A Trader's Introduction to the New Zealand Dollar

A Trader's Introduction to the New Zealand Dollar

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NextLesson
New Zealand Economic Indicators

In our last lesson we continued our discussion of the world's main commodity currencies with a look at the major fundamental factors which affect the Australian Dollar. In today's lesson we are going to wrap up our discussion on commodity currencies as well as our modules on profiles of the worlds main currencies, with a look at the New Zealand Dollar.

According to Wikipedia.org, New Zealand has a 2008 estimated population of around 4.2 million people, which is the first important fact for us to understand for two reasons. Firstly, as New Zealand's domestic market is so small, it must rely heavily on exports to drive economic growth, making the country especially susceptible to growth or decline in the global economy. This is particularly true when looking at the health of its main trading partners, the largest of which is Australia, followed by the United States, and Japan. Secondly, unlike other countries with a larger population, as the population of New Zealand is small, migration of people into and out of the country can have a significant effect on its economy, and therefore the currency. As Kathy Lien points out in her book Day Trading the Currency Market, strong population migration into New Zealand has contributed significantly to the performance of its economy, because as the population increases, so does domestic consumption.
Like Canada and Australia, New Zealand is a country with vast natural resources, making the economy and therefore currency heavily reliant on exports of commodities such as Wool, food and dairy products, wood and paper products. As Australia is the country's main export market and as the Australian Dollar is also heavily influenced by commodity prices, changes in commodity prices can have a particularly potent affect on the New Zealand Dollar. Although this correlation has broken down somewhat in recent months, as you can see from this chart, the NZD/USD and AUD/USD currency pairs are highly correlated as a result of these factors:

Chart Showing NZD/USD and AUD/USD Correlations:

The last major fundamental factor that it is important to keep in mind when trading the New Zealand Dollar is, like the Australian Dollar here again, New Zealand, as of this lesson, has one of the highest interest rates in the industrialized world currently at 8.25%. This has driven the NZD/USD pair to 25 year highs recently, before selling off a bit as a result of slower growth in the New Zealand. This is important to keep in mind, as the currency has been one of the primary beneficiaries of the carry trade flows we learned about in module 3 of this course, so interest rate expectations going forward will weigh heavily on the future direction of the currency.

As with the other currencies we have studied, in the interest of maximizing our learning I am going to defer to FXWords.com, which has a great free education section giving overviews of the major economic indicators and their relative importance to the market. You can find a link to the New Zealand Economic Indicator page below this video. For updates on when each indicator is released, as well as analysts forecasts, I recommend visiting the global calendar at Dailyfx.com, which you can find at the top of the homepage.

Thats our lesson for today, and that wraps up our lessons on the commodity currencies, and other main currencies of the world. In our next lesson we are going to begin the last module of this course, which will cover resources which can be used in strategy development which are specific to the FX Market.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

A Trader's Introduction to the Australian Dollar

A Traders Introduction to the Australian Dollar

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Important Australian Economic Indicators

In our last lesson we continued our free forex course with a look at the important fundamental factors which affect the Canadian Dollar. In today's lesson we are going to continue our discussion of the world's main commodity currencies, with a look at the Australian Dollar.

Like Canada, Australia's economy is a service based economy, with over 68% of GDP coming from the service sector. Although agriculture and mining account for only 4.7% of Australian GDP, they account for over 65% of the country's exports. This makes the currency highly sensitive to increases or decreases in the price of commodities, especially gold, as Australia is the world's 3rd largest exporter of gold.

While the country and currency are similar to Canada in many ways, a primary difference is the trade relationships that Australia has developed with Asia, and in particular Japan and China, which represent its two largest export markets. This gives the currency a unique exposure to Asia, which generally does not exist with the other non Asian currencies we have studied up to this point.

As Kathy Lien points out in her book Day Trading the Currency Market, the Australian economy was able to whether the Asian financial crisis relatively well, so while there is exposure there, it is also important to keep a watch on the country's historically strong domestic consumption, in times of global economic slowdowns.
The last major factor to keep in mind about the Australian Dollar, is that Australia has one of the highest interest rates in the developed world, currently at 7.25% as of this lesson. This has made the currency one of the primary beneficiaries of carry trade flows, which we learned about in my 3 part series on the carry trade, in module 3 of this course. These flows, combined with the facts that many commodities that Australia exports are at all time highs, and the Australian economy has remained relatively strong through the current crisis, has moved the AUD/USD to 25 year highs as of this lesson.

AUD/USD Monthly:

Charts Provided by ProRealTime.com

As with the other currencies we have studied, in the interest of maximizing our learning I am going to defer to FXword's Australian economic indicator page for more information on the important Australian economic indicators. I have included a link to this page below this video on InformedTrades, where you can find definitions of each, as well as their relative importance to the market. For updates on when these indicators are released, as well as what the market is expecting from them, I recommend checking out the global calendar at Dailyfx.com which you can find at the top of the homepage.

That's our lesson for today. In our next lesson we will finish up our discussion of the commodity currencies and the main currency pairs with a look at the New Zealand Dollar, so I hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

A Trader's Introduction to the Canadian Dollar

A Trader's Introduction to the Canadian Dollar

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Overview of Major Canadian Economic Indicators

In our last lesson we continued our free forex trading course, with a look at the major factors that affect the Swiss Franc. In today's lesson we are going to begin a discussion of the world's main commodity currencies, starting with a look at the Canadian Dollar.

There are two dominant themes that it is important to understand when analyzing the Canadian Dollar from a fundamental standpoint. The first, as its designation as a commodity currency implies, is the fact that exports of natural resources (especially gold and oil) make up a significant part of the Canadian economy. This is important to understand because as Canada is the world's 14th largest producer of oil and 5th largest producer of gold, the price of these and other commodities normally has a direct affect on the Canadian Dollar's Exchange rate.

The second thing that it is important to understand here, is the fact that as the Canadian population is relatively small in comparison to its land mass, the economy is heavily reliant on exports, which ties the country more closely together with the international economy as a whole. This is particularly true in regards to economy of the United States, as the US is Canada's largest trading partner, and 81% of Canadian Exports flow to the US.

While many people believe that the US relies most heavily on the middle east for its oil imports, it is actually Canada that is the largest supplier of oil to the United States. As the US is the world's largest oil consumer and Canada is one of the largest producers, fluctuations in the price of oil have double the impact. As we learned in our lesson on trade flows, as the US is a net oil importer and Canada is a net oil exporter, then all else being equal, a rise in the price of oil should strengthen the CAD and weaken the USD.

While exports of commodities are still a very important component of the Canadian economy, the country's service sector has experienced massive growth in recent decades, to the point where the service industry now accounts for 2/3rds of the country's economic output. This is important to understand because, as the United States is its largest trading partner, a slowdown in the US Economy can hurt the Canadian economy and its currency, even if commodity prices remain high.

As with the other currencies we have looked at, in the interest of maximizing our learning, I am going to defer to FXwords.com for an overview of the country's primary economic indicators. I have included a link to the Canadian economic indicators page on FXwords below this video on InformedTrades.com which provides a detailed overview of each, as well as their relative importance to the market. For a snapshot of when each of these indicators is released, as well as what analysts forecasts for the release are, I encourage you to use the global calendar which you can find at the top of Dailyfx.com.

That's our lesson for today. In our next lesson we will continue our discussion of the commodity currencies, with a look at the Australian Dollar so I hope to see you in that lesson.

As always if you have any questions or comments please post them in the comments section below, and good luck with your trading!

A Trader's Introduction to the Swiss Franc

A Traders Introduction to the Swiss Franc

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Swiss Economic Indicators

In our last lesson we continued our free forex trading course with a look at the British Pound. In today's lesson we are going to look at the fifth most actively traded currency in the world, the Swiss Franc.

Switzerland is one of the richest countries in the world, and while its economic policies and practices largely conform with EU standards, the country's population rejected accession negotiations with the EU in March of 2001. So, at least for the foreseeable future, the Swiss Franc is expected to remain one of the world's most actively traded currencies, with two dominating features that are important to us as forex traders.

Although this status has started to wane somewhat in recent years, the Swiss Franc has historically been considered one of the world's primary safe haven currencies, which means that money flows into the Swiss Franc during times of economic or geopolitical uncertainty. The primary reasons why this is the case are:

1. The country's ability to remain out of Global Conflicts, a reputation it solidified by remaining neutral during both World Wars.

2. Its economic stability and relatively low inflation rates.

3. The fact that up until recently the currency was 40% backed by gold.

4. Its reputation for high quality financial institutions and banking secrecy.

As you can see from this chart, traders who anticipated the Swiss Franc would strengthen as a result of its safe haven status, could have participated in the 1251 pip move lower in USD/CHF, in the 10 days following the September 11th 2001 attacks.

As another example of the Swiss Franc displaying its safe haven tendencies, traders who anticipated that the Swiss Franc would strengthen as a result of the US Invasion of Iraq, could have participated in another 1200+ pip move in the USD/CHF in the 2 months following the invasion.

In 2005 the Swiss government sold the nations vast gold inventory, and as a result the currency is no longer backed by gold. Some argue that because of this the Swiss Franc has lost much of its safe haven status, something that there will surely be more tests of in the years to come.

The second thing that it is important for traders to understand about the Swiss Franc, is its strong correlation with the Euro. As the Swiss Franc is quoted on the opposing side of the Dollar when compared to the Euro, this means that the USD/CHF currency pair has a strong negative correlation with the EUR/USD currency pair, as you can see from this chart:

As you can see here a chart of the two currency pairs shows the strong negative correlation of over 90% between the two currency pairs, resulting from the strong economic ties between Switzerland and the European Union.

The first reason that it is important for traders to understand this strong negative correlation, is so that they can take it into account when considering trades in both currency pairs. As the two currency pairs have such a high negative correlation, there is a very good possibility that a trader's technical analysis will show a buy signal in the EUR/USD, while at the same time showing a sell signal USD/CHF, or vice versa.

If this trader happened to be blind to the negative correlation we have just outlined, he or she may think that they are putting on two completely different trades. As we have just shown however, what this trader would actually be doing is doubling their exposure to the move they were trying to capture. Conversely, if a trader were to trade these pairs in the same direction, then they would effectively be reducing the potency of both trades, as the negative correlation between the two currency pairs will act to offset the gains or losses that result on each trade.

As the Swiss Franc is no where near as liquid as the Euro, on an intraday basis it is important to be aware that this negative correlation can breakdown some what. Lastly, should the Swiss political and/or economic environment (especially monetary policy) start to substantially diverge from that of the Eurozone, you could see a breakdown of this negative correlation on the longer timeframes as well.

As with the other currency pairs we are studying, FXWords.com has a great page outlining the details of all the important economic indicators for the Franc, a link to which you can find below this video. The Global Calendar at Dailyfx.com also gives you the release dates and realtime analysis of those releases, so you can be aware of them and follow the results in real time there as well.

That's our lesson for today, in our next lesson we will begin a series on the commodity currencies, starting with the Canadian Dollar, so we hope to see you in that lesson. As always if you have any questions or comments please feel free to leave them in the comments section below, and good luck with your trading!

A Trader's Introduction to the British Pound

A Traders Introduction to the British Pound

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Economic Indicators for the UK

In our last lesson we finished up our discussion of the Japanese Yen with a look at some of the major factors which move the currency, as well as where traders can go to find out more information on those indicators. In today's lesson we are going to discuss the 4th most actively traded currency in the world, the British Pound.
Although the United Kingdom is a member of the European Union, it has not yet adopted the Euro as its currency, so it is not part of the European Monetary Union. There are a number of reasons for this, but perhaps most famous is the country's forced withdrawal from the Exchange Rate Mechanism, the precursor to the Euro. As we have touched on in previous lessons, before joining the Euro countries were required to meet certain criteria, one of which was to keep the value of their currency within certain "bands". After initially trying to adhere to the qualifications set forth for participation in the European Monetary Union, the value of the pound dropped below the lower band, forcing the country out of what would become the European Monetary Union. Although the Prime Minister as of this lesson, Gordon Brown, has ruled out joining the European Monetary Union for the foreseeable future, many feel that the UK will eventually adopt the Euro, and therefore any such talk can have an affect on the pound.

The former Prime Minister of the United Kingdom laid out 5 broad economic tests that must be passed, before the UK would consider adopting the Euro. These would of course be in addition to the requirements set forth in the Maastricht treaty, which we learned about in our lesson on the Euro.

The five tests according to Wikipedia.org are:

1. Are business cycles and economic structures compatible so that the UK and others could live comfortable with Euro interst rates on a permanent basis?
2. If problems emerge is there sufficient flexibility to deal with them?
3. Would joining the EMU create better conditions for firms making long-term decisions to invest in britain.
4. What impact would entry into the EMU have on the competitive position of the UK's financial services industry, particularly the city's wholesale markets?
5. In summary, will joining the EU promote higher growth, stability, and a lasting increase in jobs?

In addition to these factors, the UK economy is a service based economy, with a heavy emphasis on financial services, and is a net exporter of oil and natrual gas, so energy prices will affect the currency.

As Kathy Lien points out in her book Day Trading the Currency Market, while the GBP/USD is a very active currency, the Pound is also very active in the crosses, and as the EU is their largest trading partner, traders pay particular attention to movements in the EUR/GBP for fundamental ques on the currency. As of this lesson the UK also has the highest interest rates in the G7, causing it to be used as the currency many traders will buy when playing the carry trade we learned about in module 3 of this course. This makes GBP/JPY one of the more active crosses in the market and one which traders who are looking for increased volatility often choose as their favorite.

Like the other currencies which we have studied, fxwords.com offers a great page listing all the indicators which move the currency, their definition, and relative importance to the market which you can find a link to below this video. This, along with the global calendar which you can find at the top of Dailyfx.com, provides a great overview and release times for all the major indicators which move the market.

Thats our lesson for today. In our next lesson we are going to look at the world's safe haven currency the Swiss Franc so we hope to see you in that lesson. As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

A Trader's Introduction to the Yen, Part III

A Trader's Introduction to the Japanese Yen Part III

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Important Economic Indicators for Japan

In our last lesson continued our discussion on the Japanese Yen, with a look at what happened to the Yen and Japan's economy after their asset price bubble began to burst in 1990, and how this still affects the currency today. In today's lesson we are going to wrap up our discussion on the Yen, with a look at Bank of Japan Intervention, and other fundamental factors which move the currency.

As we touched on in our first lesson in this series, Japan has few natural resources of their own, so they are an economy that relies heavily on imports of natural resources such as oil. This is something to keep in mind when trading the currency, because as Japan imports almost 100% of its oil from overseas, increases and decreases in the price of oil will normally have an affect on the value of the Yen.

The second thing that it is important to keep in mind, is that the Japanese economy relies heavily on exports such as cars and electronics to grow their economy. As a result of this, the value of Japan's currency is an even more important factor in their economic growth than for countries which do not rely so heavily on exports to drive domestic growth. As we learned about in our lessons on trade flows, a stronger Yen automatically means that Japanese goods and services become more expensive for overseas consumers, which will hurt Japanese exports.

To keep the Yen from rising to the point where it would hurt the Japanese economy, the Bank of Japan is notorious for intervening in the foreign exchange markets, which can send the value of the yen plummeting.

Below is a graph provided by Dailyfx.com which shows some of the history of Japanese intervention, which as you can see tends to take place around the 100 level in the currency. As the BOJ has been so effective with intervention in the past, it has gotten to the point now where all they need to do is talk of intervention (something called verbal intervention) to yen based pairs rocketing higher.

As with all the currency pairs we are studying, there are many economic indicators which affect the value of the yen, that we could spend much time discussing. As we have already covered the major indicators for the US in module 8 of our basics of trading course, and as the indicators in Japan are much the same, in the interest of maximizing our learning time I am going to point you towards two free sites for more information.

The first is FX Words Trading Glossary and their economic indicators page for Japan the link to which you can find below this video. As you can see here they provide not only the definition of each of the major releases but also the importance of the indicator to the market.

The second site is the global calander which you can find by clicking the calendar button at the top of dailyfx.com. As you can see here in addition to giving you the importance of the indicator, they also give you the time it is schedualed for release, the forcast, and where you can go to find out more information.

Thats our lesson for today and that wraps up our three lesson series on the Japanese Yen. In our next lesson we will start a new series on trading the British Pound so we hope to see you in that lesson. As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

A Trader's Introduction to the Yen, Part II

A Trader's Introduction to the Japanese Yen Part II

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In our last lesson we began our discussion on on the Japanese Yen, with a look at the history of the Japanese economy, including the build up of what became one of the biggest asset price bubbles in history. In today's lesson we are going to continue this discussion by examining what happened from the early 1990's on from a monetary policy and economic standpoint, so we can understand the fundamental foundation on which the Yen sits today.

In 1989 the Bank of Japan (BOJ) began to raise interest rates, and the government instituted limits on total bank lending to the real estate sector, to try and reign in speculation which was driving stock and real estate prices to astronomically high levels. While the central bank was hoping to simply take the foot of the gas and tap the breaks on the economy, unfortunately the markets reaction was drastic, resulting in a stock market and real estate crash starting in 1990.
This was a "perfect storm" so to speak for the Japanese financial system and economy, as the effects of decline in real estate and stock market prices started a chain reaction, which reverberated throughout the economy and whole financial system. The first and perhaps most important thing to understand here, is that the economic slowdown, combined with drastic falls in the stock and real estate markets, caused the financial position of Japanese banks to rapidly deteriorate.

Much of the speculation that was sending real estate prices so high was being driven by loans from Japanese banks, which took the land they were making the loan on as collateral. As the quality of the loan was thus tied to the value of the real estate backing that loan, as real estate prices fell off a cliff so did the quality of the bank's loan portfolio's.

Secondly, large Japanese institutions such as banks cooperate with one another in Japan, and as a result of this Japanese banks hold large quantities of each others stock. Holdings of stock are considered an asset for the banks and were included in the banks capital numbers, which basically define how financially solid a banks balance sheet is. As the value of these stock holdings tumbled lower, so did the bank's capital position, putting further pressure on the stability of the individual banks in Japan, and the Japanese Banking System as a whole.

Thirdly, as the economy slowed as a result of all this, the individuals and corporations who had received loans began to have a harder time making their payments, further deteriorating the quality of the bank's loans, and stability of the banking system.

At least partially as a result of weak corporate governance, most will argue that Japanese banks did little to adjust to the financial difficulties they now faced, instead preferring to wait for stock and real estate prices to move back towards their pre bubble bursting levels. The government also did little to address the problem until 1995, when it became clear that without government intervention massive bank failures would result.

This history is important to us as traders for two reasons:

1. Reforms aimed at returning the stability of the Japanese financial system are still ongoing today, and it is these financial and structural reforms that traders watch closely when determining the fundamental direction of the Japanese Economy.

2. Japanese consumers, many of whom had lost large sums of money in the real estate and stock markets, lowered consumer spending significantly, resulting in prices actually starting to decrease towards the end of the 1990's, something which is known as deflation.

While many argue that the Bank of Japan acted too late they did eventually respond to the economic weakness with interest rate cuts driving interest rates in Japan down from over 8% in 1990, all the way to zero percent in 1999. While the Bank of Japan has increased interest rates in Japan to .5% since then, this is still by far the lowest rate of any of the the major economies of the world. As a result of this it is very cheap to borrow Japanese Yen, making it the primary funding currency for the carry trades, which we learned about in module 3 of this course. One cannot fully understand and anticipate movements in the Japanese Yen, without a full understanding of the carry trade, so if you have not done so already I encourage you to go back and review the three lesson series in Module 3 on the carry trade.

That's our lesson for today. In tomorrow's lesson we will wrap up our lesson on the Yen with a look at the history of Bank of Japan interventions in the currency market, and the major economic indicators which move the currency.

As always if you have any question's or comments please leave them in the comments section below, and good luck with your trading.


Outside Resources:

BIS Paper on the Japanese Asset Price Bubble

JAPAN'S BUBBLE ECONOMY

http://www.imf.org/external/pubs/ft/wp/2000/wp0007.pdf

A Trader's Introduction to the Yen, Part I

Trading the Japanese Yen Part I

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Next Lesson

In our last lesson we finished up our discussion on the Euro, with a look at the major economic indicators which affect the currency, and where traders can go to follow those indicators. In today's lesson we are going to continue our free forex trading course, with a look at the next most actively traded currency in the world, the Japanese Yen.
Japan has the second largest economy in the world behind the United States, and an economic history that is the starting point for understanding the fundamentals of the Yen. The first thing that it is important to understand from a fundamental standpoint about the Japanese economy, is that unlike the United States, Japan has very few natural resources. As a result of this, prior to World War II, Japan had a large military force, which it used to occupy Korea, Taiwan, and parts of China. The country saw this as necessary, because of the vulnerable position that its lack of natural resources would have otherwise put it into.

Like with Europe however, World War II, set the country back considerably from an economic standpoint, as according to wikipedia.org, 40% of its industrial plants and infrastructure were destroyed. While no one would obviously wish for that type of destruction, there was actually a silver lining in this for the Japanese Economy. As so much of their infrastructure had been destroyed, this gave the Japanese the ability to upgrade it significantly, ultimately giving them an edge over victor states, who now had much older factories.

After World War II the United States occupied Japan, which resulted in the building of a democratic nation, that was dominated by industry, instead of the military. As the Japanese were now putting all of the focus, which had before been put into the military, into rebuilding their industries, they were able to not only match their pre war production levels by 1950, but surpass them. In the decades that followed Japan proved very competitive on the international stage, and its economic growth in the 60's, 70's and 80's has been described as nothing short of astonishing.

If you were around living in the US during the 80's, you can probably remember the envy and fear among the US population, that Japan was quickly going to overcome the United States as the world's economic power house.

While I don't think there is any question that the quality of Japanese products and services has remained very high since the 80's, unfortunately Japan's economy derailed in the early 1990's, culminating in the busting of one of the most famous asset price bubbles in history.

In the decades following World War II the Japanese population had one of the highest savings rates in the world. As more money was being saved, this meant there was more money available for investment, making access to credit much easier than it had been in the past. As Japan's economy was and still is an export oriented economy, the value of the currency also went up dramatically during this time. The combination of a strong economy, easy access to credit, and a strengthening currency made Japanese assets especially attractive.
As its economy seemed unstoppable, and newly wealthy Japanese saved more and more money, much of that capital flowed into the stock and real estate markets. As you can see from this chart the stock market roared through the 1980s, almost quadrupling in value in 5 years. In the most expensive districts, according to wikipedia.org, real estate prices reached as high as $139,000 per square foot.

From the high of the stock and real estate markets in 1990, both markets made a slow and painful decline. It took until 2003 for the stock market to finally bottom, down from a top of around 39,000 to a bottom of around 7600. According to wikipedia.org, prices for the most expensive commercial real estate properties stood at 1/100th of their pre bubble bursting peak, and $20 Trillion in wealth had been wiped out in the stock and real estate markets.

While this may seem like a history lesson that is not relevant to traders, as we will learn in tomorrow's lesson, the affects of Japan's asset price bubble on the Yen are still being felt today, and therefore an understanding is necessary to know how today's market will react to different fundamental events.

That's our lesson for today. In tomorrow's lesson we will look at the long road to recovery that Japan is still traveling down today, how this affects their monetary policy, and therefore the value of their currency.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

How to Trade Euro Fundamentals

Trading Euro-Zone Economic Indicators - A Trader's Intro to the Euro Part III

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PreviousLesson

In our last lesson we continued our discussion of the Euro with a look at its introduction, and the major factors which will determine the long term fundamental direction of the currency. In today's lesson we are going to continue our free forex trading course, with a look at the major economies in the Eurozone and how each affects the value of the Euro.

As you can see from this graph, member countries Germany, France, Italy, and Spain make up over 75% of the Eurozone's GDP. As a result of this economic data out of these countries has the tendency to move the Euro the most, so traders naturally pay them more attention.

There are literally thousands of economic numbers released in the Eurozone however, like we covered in module 3 of this course, those that affect the current account (trade flows) or interest rates (capital flows) are going to have the greatest potential to move the currency. All of the indicators which we cover in module 8 of our basics of trading course, have a counterpart in the EU. Most of the time they are also named the same, and as they show the same things, traders can expect the market to react accordingly. The only thing to keep in mind here is that the economic climate in the United States vs. the Eurozone will differ at times, so traders and therefore the market may react differently to the same number out of the EU than they do out of the US.
The second thing that it is important to understand about EU economic releases, is the different mandate of the European Central Bank, versus the Federal Reserve. Where the Federal Reserve has a dual mandate of maximizing employment and maintaining price stability, the ECB's mandate is solely to maintain price stability. With this in mind, the ECB is normally seen as more hawkish than the federal reserve, meaning they are more likely to hold steady or raise interest rates when economic data show price increases, and less likely to cut interest rates as quickly as the fed when growth in the Eurozone slows.

I could spend many lessons covering each of the economic indicators and their relative importance to the market but in the interest of maximizing our learning I am going to instead defer to two free sites which do an excellent job here.

Fxwords.com and specifically their page on Euro-Zone Economic Indicators which I have included a link to below this video. As you can see here they categorize the major economic reports and then list them out with stars representing the relative importance of the indicator to the market. If you click on the link for each indicator it will take you to a page giving a definition as well as commentary on how traders should expect the release to affect the market.

Once you have an understanding of the economic indicators then you can get the date, time, and forecast for the release from the global calendar which you can find by click the calendar button at the top of Dailyfx.com. As you can see here the importance of the indicator to the market is also indicated with stars on the calendar, and the important indicators have links where you can go for more information.

Thats our lesson for today and that wraps up our series on the Euro. In our next lesson we will look at the next most actively traded currency in the world, the Japanese Yen so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

A Trader's Introduction to the Euro, Part II

A Trader's Introduction to the Euro Part II

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In our last lesson we began our discussion on the Euro, with a look at the history leading up to the formation of the European Union and the criteria that had to be met before the Euro's launch. In today's lesson we are going to continue our discussion on the Euro, with a look at the introduction of the currency, as well as some of the factors which affect its long term fundamentals.

As we discussed in our last lesson, the Euro was launched as an electronic currency on January 1st 1999. As you can see from this chart, the markets initial confidence in the Euro, and really the European Union as a whole, was initially not very high. Over the next year the currency sold off from just above 1.1600 dollars to 1 Euro at its inception, to a low point of around .8200 cents to 1 Euro towards the end of 2000. While the tables have turned now in the Euro's favor, it actually took the European Central Bank intervening in the markets and buying Euros, to keep the currency from sliding further in 2000.

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The launch of the Euro was the largest monetary changeover ever, and as you can see, was not guaranteed success. As we touched on in our last lesson, getting a dozen countries, which varied widely in their economic and political clout, to give up control over their own monetary policy and switch to a more centralized monetary system, was no easy task.

As we learned about in module 8 of our basics of trading course, one of the most powerful tools that countries have to try and manage their business cycle is monetary policy, a tool which those adopting the Euro were essentially giving up. Although we have not seen a real test of this yet, you can imagine a situation where the economy of one of the major countries in the EMU such as Germany, goes into recession, but overall growth in the rest of the EMU is steady. If Germany were not part of the EMU, they could cut interest rates to try and bring their economy out of recession. Since they are however, their hands would be tied in this situation from a monetary policy standpoint, which may drive their economy deeper into recession than would otherwise be the case.

As we also learned about in module 8 of our free basics of trading course, countries have a second tool to manage the business cycle, which is Fiscal policy. As the EMU nations are still primarily independent from a fiscal policy standpoint, they do still have this in their toolbox. The issue here however, is that one of the ongoing requirements established in the Massstricht treaty for countries which join the EMU, is that member country's budget deficits must be less than 3% of GDP. So here again member nations are someone limited in what they can do to help their own economies, should it falter.

Of all the things to understand about the Euro from a fundamentals standpoint, it is this that is the most important, as it is here that a true test of the Euro, will eventually come.

So far I think most would agree that the Euro has been a resounding success, and since the original 12 countries replaced their currencies with the Euro as their paper currency in January of 2002, 3 more EU member nations have joined the EMU, and 5 other countries outside the EU have adopted the Euro as their official currency.

As a result of its success and the large combined economies that the currency represent, many feel that the Euro will one day replace the US Dollar as the premiere currency of the world. If you have thoughts on this I would love for you to share them in the comments section below.

Thats our lesson for today. In our next lesson we will look at the major economies of Europe which traders watch closely for fundamental direction in the currency so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

A Trader's Introduction to the Euro, Part I

A Trader's Introduction to the Euro Part 1

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NextLesson

In our last lesson we finished up our discussion of the US Dollar, with a look at some of the economic indicators which move the currency, and where traders go for commentary on those numbers. In today's lesson we are going to begin our discussion on the next most traded currency in the world, the Euro.
The Euro is now the official currency of 15 of the 27 member states in the European Union (EU), which makes it the currency used by over 320 Million people. Like Europe itself, the Euro has an interesting history, which we as traders must understand to have a full understanding of the fundamentals of the currency. There are two major factors which lead to the eventual formation of the European Union, and therefore the Euro, which are important for traders to understand.

1. The major powers in Europe had been battling each other for hundreds of years prior to World War II. Nothing like the decimation that the World Wars brought to Europe had ever been seen before however, so after World War II, there was a realization that a drastic reordering of the political landscape was needed, in order to put nationalistic rivalries to bed once and for all.

2. Also as a result of World War II, the world's power structure had shifted, and the major European countries who were once the superpowers of the world, were replaced by two new superpowers. The United States and The Soviet Union were now the unrivaled superpowers of the world, and as a result there was a keen awareness among the former world powers of Europe, that banding together was the only way for Europe to have comparable clout on the world stage.

It was primarily as a result of these two factors that the European Coal and Steel Community (which eventually became the European Economic Community, the predecessor to the European Union) was founded in the 1950's with the general goals of:

1. Lowering trade barriers and facilitating economic cooperation for the benefit of the member nations.

2. Increasing Europe's clout on the world stage

3. Integrating the economies of the major countries in Europe to the point where they were too reliant on one another to go to war again.

During the next several decades many things happened from a diplomatic and trade standpoint that are very interesting, and which can be read about by doing a search on google for the history of the European Union. The next important event for us as traders however, came with the ratification of something which is known as the Maastricht Treaty in the 1990's. Up to this point, the idea of a tie up between nations in Europe was primarily focused on removing trade barriers and promoting economic cooperation. With the Maastricht treaty, member countries moved from a simple economic cooperation, to the much grander ambition of political integration between member nations.

This is important to us as traders as it was here that plans for a single currency to be used among member nations was introduced, and therefore here that the basic fundamentals of the Euro were laid out. There were three steps outlined in the Maastricht treaty that had to be completed before the currency could be released which were:

1. Free circulation of capital among member countries.

2. The second, and most important step for us as traders to understand, was the coordination of economic policies. Once the Euro was introduced, each of the member countries would be bound by the monetary policy as set by the European Central Bank. With this in mind, you could not have countries with extremely different levels of inflation and interest rates, replace their currency with the Euro, without undermining the credibility and fundamentals of the currency. To make the currency credible, and to make its introduction as smooth as possible, member countries were required to keep inflation, interest rates, and debt below certain levels. Lastly, they were also required to maintain an exchange rate that was basically a banded peg, allowing their currency to fluctuate only within a narrow band.

3. In 1999 the European Central Bank was established and the eleven countries listed here began to use the Euro in electronic format only.

Spain, Portugal, Italy, Belgium, the Netherlands, Luxembourg, France, Germany, Austria, Ireland and Finland.

These countries formed what is known as the European Monetary Union, which is comprised of countries who are members of the European Union, and use the Euro as their currency.

Greece, the United Kingdom, Sweden, and Denmark (the other members of the European Union at the time) remained outside the European monetary Union for different reasons.

While this may seem a bit like a history lesson rather than a lesson in trading, it is very important for traders of the Euro to have an understanding of the history we have just gone over. As we will learn in coming lessons, it is because of this history that the Euro is where it is today, and many of the concepts we have just outlined still affect the value of the currency in today's market.

That's our lesson for today, in our next lesson we will continue our discussion of the Euro, with a look at what happened when the Euro was officially introduced, and how the European Union and European Monetary Union have expanded since the introduction of the currency.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

Economic Numbers that Move the US Dollar

Economic Releases that Move the US Dollar and Where to Find Them

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PreviousLesson

In our last lesson we finished up our series on what traders watch for when analyzing the long term direction of the dollar. In today's lesson we are going to continue our free forex course, with a look at where to go to find the economic data releases that move the dollar.
As you can probably imagine, we could spend many lessons and multiple hours going over each of the economic indicators that affect the price of the US Dollar. It is for this reason, that before getting into any of the actual indicators, I wanted to give everyone an overview of the broad things that move the market. As we have discussed in previous lessons the two broad categories that pretty much everything that moves the forex market fits into, are trade flows and capital flows, as covered in module 3 of this course.

Once you have an understanding of this, all that is necessary to understand how economic numbers move the dollar, is to understand which numbers are important to the market at the time, whether those numbers fit into the trade flows or capital flows category, and how they should affect the dollar as a result.

As we learned in module 8 of our basics of trading course, how the market reacts to economic releases is generally determined by two factors:

1. How important the market considers a particular release to be.

2. How close to market estimates the number comes in at. Remember that markets anticipate news, so generally if an economic release comes out as expected, there is very little if any market reaction to that release.

How important the market considers a particular economic release to be, is something that changes over time depending on what is happening from a US Dollar fundamentals standpoint. If there are worries that the economy is going into recession, then the market is going to be extra sensitive to any numbers, such as non farm payrolls and consumer spending, which may provide early warning signs that this is the case. Conversely, if the economy is heating up and the markets are worried that inflation may become a problem, then the most market moving numbers may be price data releases, such as the CPI and the PPI. For your reference, according to Dailyfx.com the most market moving indicators for 2007, in order of importance were:

1. Non Farm Payrolls
2. FOMC Releases
3. Retail Sales
4. ISM Manufacturing
5. Inflation
6. Producer Price Index
7. The Trade Balance
8. Existing Home Sales
9. Foreign Purchases of US Treasuries (TIC Data)

We have discussed most of these indicators already, and for those which we have not, a quick google search, and review of the indicator in the context of whether it fits into trade flows or capital flows, should answer the question of why they move the market.

Although I am probably a little biased since I used to work with the people who run the site, I am a very big fan of Dailyfx.com as the place where I go to find out what economic data is due for release, and for commentary on the number after the release. They have a great global calendar which you can find at the top of the site as well as tons of both technical and fundamental commentary on everything that affects the US Dollar and forex market in general.

For this lesson specifically, if you click the calendar button at the top of the site you will see they have all of the economic data releases from the major countries of the world with the time of the release, the previous number, the forecasted number and the actual number which is updated after the release. You will also notice here they have links for the more important numbers giving a definition of the release, the relative importance of the release, and the latest news release relating to that release.

If you click back to the homepage of the site you will see lots of fx related reports which the Dailyfx staff puts out throughout the day. Two of my favorite reports are the Daily Fundamental report by Kathy lien, and the US Open Market Points by Boris Schlossberg which you can find in the middle of the page.

As we discussed in module 8 of our basics of trading course, the best way to get a feel for how economic numbers affect the market, and which numbers are in focus, is to start following the market on a daily basis and seeing how it reacts to various news events. As this is the case, I highly recommend following the commentary on Dailyfx.com as well as the forex commentary on InformedTrades.com, and start putting your analysis to practice on your real time demo accounts. If you have not registered for a free realtime demo account I have included a link above this video where you can do so.

That's our lesson for today, and that wraps up our discussion on the US Dollar. In the next lesson we are going to look at the next most traded currency in the world, the EURO so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

Determining the Fate of the US Dollar Part III

Determining the Fate of the US Dollar Part III

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PreviousLesson                                                                                                                              NextLesson

In our last lesson we finished up our discussion on the most important factor which will determine the fate of the US Dollar, its status as the reserve currency of the world. In today's lesson we are going to wrap up our discussion on the fate of the US Dollar, with a look at the other three factors traders watch when analyzing the long term fate of the dollar.

If you remember from our first lesson on "Why the US Dollar is Still King of the Currency World", we listed 4 main contributing factors. As we just discussed, the most important factor is its status as the world's reserve currency. Next in line in importance, is the fact that so many foreigners invest in US Assets, and/or hold their savings in US Dollars. According to Kathy Lien's book Day Trading the Currency Market "Foreign direct Investments into the United States are equal to approximately 40% of total global net inflows for the US. On a net basis, the US absorbs 71% of total foreign savings." This is a huge amount of money being held in US Dollars, to the point where foreign individuals and institutions taken together, have enormous control over the fate of the US Dollar.

With this in mind, there are several things that traders watch for when trying to detect any change, which would affect foreigners appetite for US assets, and/or the US Dollar. As individuals and corporations have many of the same concerns that a central bank has in holding US Dollars, we have already covered most of the factors that will affect private individuals and institutions appetite for the dollar. These are things like return on their investments (so basically stock market performance and bond yields), anything they feel may affect those returns (things such as monetary policy and general economic soundness), and the relative value of the dollar itself.

One factor which we have not discussed yet is the general stability of the United States. Before September 11th, the US Dollar was considered a safe haven currency, which would strengthen in times of global uncertainty, as the US was considered one of the safest and most stable places in the world. The events of September 11th diminished the US Dollar's status as a safe haven currency some what, a status which it has struggled to regain ever since.

Next in line of importance is the US Dollar's role in international trade. Many commodities such as gold and oil are quoted in US Dollars in the international markets, and because of this many countries use the US Dollar in international transactions. As we discussed in our lesson on why the US Dollar is Still the King of the Currency world, this creates a lot of demand for the US Dollar, which helps keep foreigner's appetite for the currency strong. As a result, traders are very wary of any talk from countries outside the US, about moving away from the dollar as the de facto currency for international transactions. This is especially true about countries that are a part of OPEC, the oil cartel made up primarily of the oil producing countries in the Middle East.

We should now have a good understanding of each of the factors which traders watch when trying to determine the long term fundamental position of the dollar, which are:

1. Its status as the reserve currency of the world,

2. Countries willingness to use the US Dollar in their currency pegs, and the soundness of those pegs

3. Foreign interest in the US Dollar, and US Dollar denominated assets, from individuals and corporations,

4. The pricing in dollars of commodities in international markets

That wraps up this lesson and our series on the factors which will determine whether or not the US Dollar remains the king of the currency world. In our next lesson we will look at some of the key fundamental data which tends to move the dollar outside of these four factors, so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!