Currency Trading For Dummies. Kathleen Brooks

Скачать книгу

alt="Remember"/> The U.S. dollar is the most important global currency, with the bulk of forex trading usually involving the dollar on one side of the transaction. Commodities are priced in dollars, and a vast amount of global currency reserves held by central banks is in dollars. This makes the dollar (also affectionately referred to as the “greenback” or the “buck”) the most liquid currency in the world. As a trader, you need to know whether the dollar is strong or weak. The U.S. dollar index helps you do this because it gives you a broad-based view of how the dollar is performing in the G10 forex space. As a currency trader, be sure to follow the U.S. dollar index, especially its technical developments.

      

The easiest way to trade the U.S. dollar index is through a futures account (see Chapter 14) using call and put options, which are covered in Chapter 15.

Looking at Currencies and Other Financial Markets

      As much as we like to think of the forex market as the be-all and end-all of financial trading markets, it doesn’t exist in a vacuum. You may even have heard of some of these other markets: gold, oil, stocks, and bonds.

      There’s a fair amount of noise and misinformation about the supposed interrelationship among these markets and currencies or individual currency pairs. To be sure, you can always find a correlation between two different markets over some period of time, even if it’s only zero (meaning the two markets aren’t correlated at all).

      

Be very careful about getting caught up in the supposed correlations between the forex market and other financial markets. Even when a high degree of correlation is found (meaning the two markets move in tandem or inversely to each other), it’s probably over the long term (months or years) and offers little information about how the two markets will correlate in the short term (minutes, hours, and days). The other point to consider is that even if two markets have been correlated in the period, you have no guarantee that the correlation will continue to exist now or into the future. For example, depending on when you survey gold and the U.S. dollar, which supposedly have a strong negative correlation, you may find a correlation coefficient of as much as –0.8 (a solidly negative correlation) or as low as –0.2 (very close to a zero correlation, meaning that the two are virtually noncorrelated).

Always keep in mind that all the various financial markets are markets in their own right and function according to their own internal dynamics based on data, news, positioning, and sentiment. Will markets occasionally overlap and display varying degrees of correlation? Of course, and it’s always important to be aware of what’s going on in other financial markets. But it’s also essential to view each market in its own perspective and to trade each market individually.

      With that rather lengthy disclaimer in mind, the following sections look at some of the other key financial markets and show what conclusions we can draw for currency trading.

      Gold

      Gold is commonly viewed as a hedge against inflation, an alternative to the U.S. dollar, and a store of value in times of economic or political uncertainty. Over the long term, the relationship is mostly inverse, with a weaker USD generally accompanying a higher gold price, and a stronger USD coming with a lower gold price. However, in the short run, each market has its own dynamics and liquidity, which makes short-term trading relationships generally tenuous.

      

Overall, the gold market is significantly smaller than the forex market, so if we were gold traders, we’d sooner keep an eye on what’s happening to the dollar, rather than the other way around. With that noted, extreme movements in gold prices tend to attract currency traders’ attention and usually influence the dollar in a mostly inverse fashion.

      Oil

      A lot of misinformation exists on the internet about the supposed relationship between oil and the USD or other currencies, such as CAD, NOK (Norwegian krone), or JPY. The idea is that, because some countries are oil producers, their currencies are positively (or negatively) affected by increases (or decreases) in the price of oil. If the country is an importer of oil, the theory goes, its currency will be hurt (or helped) by higher (or lower) oil prices.

      Correlation studies show no appreciable relationships to that effect, especially in the short run, which is where most currency trading is focused. When there is a long-term relationship, it’s as evident against the USD as much as, or more than, any individual currency, whether an importer or exporter of black gold.

The best way to look at oil is as an inflation input and as a limiting factor on overall economic growth. The higher the price of oil, the higher inflation is likely to be and the slower an economy is likely to grow. The lower the price of oil, the lower inflationary pressures are likely (but not necessarily) to be. Because the United States is a heavily energy-dependent economy and also intensely consumer-driven, the United States typically stands to lose the most from higher oil prices and to gain the most from lower oil prices. We like to factor changes in the price of oil into our inflation and growth expectations, and then draw conclusions about the course of the USD from them (see Chapter 7). Above all, oil is just one input among many.

      Stocks

      Stocks are microeconomic securities, rising and falling in response to individual corporate results and prospects, while currencies are essentially macroeconomic securities, fluctuating in response to wider-ranging economic and political developments. As such, there is little intuitive reason that stock markets should be related to currencies. Long-term correlation studies bear this out, with correlation coefficients of essentially zero between the major USD pairs and U.S. equity markets over the last five years.

      The two markets occasionally intersect, though this is usually only at the extremes and for very short periods. For example, when equity market volatility reaches extraordinary levels (say, the Standard & Poor’s [S&P] loses 2+ percent in a day), the USD may experience more pressure than it otherwise would — but there’s no guarantee of that. The U.S. stock market may have dropped on an unexpected hike in U.S. interest rates, while the USD may rally on the surprise move.

      In another example, the Japanese stock market is more likely to be influenced by the value of the JPY, due to the importance of the export sector in the Japanese economy. A rapid rise in the value of the JPY, which would make Japanese exports more expensive and lower the value of foreign sales, may translate to a negative stock-market reaction on the expectation of lower corporate sales and profitability.

      

In the world of currencies, the investing and speculative choices for participating have expanded greatly since the last edition of this book. I (coauthor Paul) think that currency exchange-traded funds (ETFs) are a fantastic way to speculate in the currency markets without all the head-scratching complexity of forex and currency futures (check out ETFs in Chapter 13). Another currency-related vehicle that has grown tremendously in terms of popularity and acceptance in recent years has been cryptocurrencies. Find out more in

Скачать книгу