You Are The Worst dot Com

If you have been watching the news in the forex market lately, you have definitely heard about the “Carry Trade.” For many forex traders, however,—especially those just getting started—the Carry Trade can be confusing.

Have you ever asked yourself the following: Why has the Carry Trade has been so dominant for the past few years? What does it mean to unwind a Carry Trade? What is rollover?

S. Wade Hansen of PFXGlobal.com sat down for an interview with the founder of TraderInterviews.com, Tim Bourquin, to answer these questions. What the Carry Trade is, why so many big institutional investors and smaller retail traders like to use it and how you can take advantage of it in your own account will be further explored in the interview.

Click here for a link to the interview:

http://www.pfxglobal.com/index.php?option=com_content&task=view&id=1803

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With all the hype recently about Goldman Sachs being the only major investment bank to avoid being stung in last year’s subprime mortgage fiasco and the record profits it rung up last year, bonus time was expected to be a time of good cheer for Goldman employees.

But, according to The New York Post, some were not so happy with their year-end stocking stuffers. The paper, citing “whispers”, said that some cost center employees, the back office operations, IT employees and such, were getting stiffed.

The firm’s chief executive, Lloyd C. Blankfein, was rewarded with a record $67.9 million bonus, while its co-presidents, Gary Cohn and Jon Winkelried, each received bonuses of about $40.5 million, up 58 percent from last year. And the bank also set aside 20.2 billion to pay employee wages, benefits and bonuses this year, a 23 percent increase from last year.

But cost center workers expecting 75 percent of their salary as a bonus, got only 15 percent, the newspaper said.

Link

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I stumbled upon this great magazine that focuses entirely on currency trading and the best thing is that it is FREE. Here are some features that the magazine offers:

Analysis of real trades
Virtually all good traders agree that maintaining a log or diary of trades is one of the most valuable learning tools available to all traders – the best way to learn from our inevitable mistakes. Each month we dissect a trade, discussing the system, strategy or catalyst that triggered an entry. Risks are identified and defined. The trade’s outcome is analyzed. Finally, we gauge how well the trade plan was executed and what lessons the trade imparted.

Interviews with top traders
Learn from the top traders, analysts and market movers in our exclusive interviews.

Trading system analysis.
Detailed historical testing and research is the best way to find out if a trading idea has merit. Currency Trader includes rigorous historical back-testing of mechanical strategies, explores system design and provides complete analysis results.

Economic and industry news
Foreign exchange is a global by nature, so keeping tabs on markets and economies around the world is a top priority for currency traders. Currency Trader will help stay abreast of the most important issues and events shaping the global economy, the forex market and the trading industry.

Global Market Summary
This roundup of global currency, interest rate and stock index performance keeps the world markets at your fingertips each month. Markets are ranked by strength, liquidity and volatility. Also included are economic barometers such as international trade balance, GDP and employment numbers.

Reviews of Web sites, software and other technology and books.
Look before you leap! Get the latest on trading software, Web sites, books and other educational material before you pay good money for them.

New products, services and industry events.
Stay on top of the latest products and services geared to forex traders, as well as upcoming industry seminars and events.

Trading calendar
Because you’re watching more than one currency, country and economy, the lists upcoming economic report releases, government statistics and market holidays.

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Non-Farm Payrolls in the month of December shocked the financial markets by increasing only 18k, which is almost as bearish as negative job growth because the last time we saw levels worse than this was in August 2003 when the US economy shed 42k jobs. The US dollar fell 100 pips against the Japanese Yen in a blink of an eye and rallied by almost the same amount against the Euro and is 100-150 pips away from my previous prediction on the USD-JPY.

The expectations are that slump in the housing sector may continue thru 2008-therefore jobs will be the key indicator of whether the US consumer will continue to spend at a level which will prevent the economy from falling into recession. The problem is that job creation is been weakening over a long period of time and hence supporting a further rate cut in the next Fed meeting. Further evidence are seen in sectors that reported more job losses than job growth with the biggest contraction seen in manufacturing, construction, retail trade, information and financial sectors. The unemployment rate also increased from 4.7 to 5 percent, a 2 year high.

Since the headline number turned out disappointing, the Equity and Carry Trade markets are taking a big hit and could go into a downward trend that lasts for day and the bias against USD pairs will continue.

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The new year brings us a chance to make some predictions so I thought it was a good idea to throw out some ideas for the first half of 2008. Feel free to post yours as well.

1. Currency

The trend for the dollar will be weakness vs. the Euro and Yen, but strength vs. the Pound in H1 2008. The Euro will appreciate and continue to replace the dollar’s reserve currency status as the U.S. economy continues to cool during this period. Market turmoil will also accelerate the dollar’s losses vs. the Yen as carry trade positions are further unwound. Two factors will lead to the dollar’s gain on the Pound; unwinding of carry trades and UK economic weakness leading to further BoE rate cuts.

2. Equities

A cascade of problems exist for consumers and therefore business and equity markets. Consumer spending has the potential to take a huge hit due to factors such as rising food and energy costs, falling home values, weaker job creation and higher rates of unemployment, to say nothing of stagnant wages in real terms.

Businesses have been facing rising material costs for many months now while core CPI and PCE have remained contained. The bump up for these readings in their last reports indicate pass-thru effects may be starting to take place. Exports have continued to stay strong but rising commodity prices may squeeze profit margins, which will lead to lay-offs. Q4 Profits in the S&P 500 are projected by Reuter’s to fall 6.1%, as opposed to the October estimate for an 11.5% gain in the period. Profits in Q1 and Q2 2008 have also been revised down from October’s 11.4% projected gain to 5.1% and 5% respectively. Q3 2007 profits in the S&P 500 are already down nearly 4.0% from Q2.

3. Housing

Demand and therefore prices will continue to fall at least thru the first half of 2008. One of the main drivers of this are new mortgage regulations for conforming Fannie and Freddie loans. Increased fees and increased mortgage insurance requirements along with their demands for higher credit scores for prime borrowers (680 from 620) and higher down payments will shrink the pool of available buyers significantly. Also, as prices continue to fall, sellers and buyers will be more reluctant to get into the the market. There’s also the huge inventory overhang to deal with, which means supply is outstripping demand and placing downward pressure on price.

4. Economy/Fed

There’s no question the economy will slow; the only remaining questions are the depth and length. Another question that will be crucial for market survival is what the Fed will be able to do about it. The TAF auction system is helping to ease the liquidity squeeze, but the overall effect on the real economy is limited. A far more serious concern for the Fed and the economy in general is that the period of slackening demand may be accompanied with rising inflation i.e. stagflation. So while the Fed is expected to ease towards 3.5% in the overnight rate, the pace of reduction may be slowed and will likely be accompanied by more hawkish rhetoric in their statements and minutes-also a negative to carry trades and the equity markets in general.

5. China/Oil/Commodities

The trend for China to allow the Yuan to appreciate faster vs. the dollar will be a main feature for the global economy going forward. What’s essentially happening is that China is looking to control its inflation by lowering the prices it pays for commodities (which are paid for in dollars)-hence the faster appreciation of the Yuan. China also lowered its import tariffs on oil, further cheapening its price for Chinese businesses. Demand from China for global commodities will increase, which will have the ultimate effect of increasing their prices here. Oil could easily head towards $125.00/bbl in six months time which will drive the stagflationary environment in the U.S. that some economists are predicting.

For more details in-depth analysis on fundamental issues, please visit thenewstraderfx.blogspot.com.

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Two big headlines dominated the news waves today:

1. Oil surpassing the critical psychological mark of $100 a barrel due to violence in Nigeria, ongoing dispute between the U.S. and Iran and the shortfall of oil OPEC production projections.
2. Gold surpasses the vital $850 barrier topping out at $859.30 which represents a high not seen since January 1980 due to the rising of geopolitical tensions and a weaker dollar.

How does this affect the currency markets?

With the rise in oil, this will surely indicate an eventual slowdown in global growth due to rising energy costs and given the recent geopolitical tensions arising in Pakistan and Nigeria , this has given rise to exit of risky assets such as the carry trades and a flight to safe haven assets such as gold. As seen in today’s light trading, the Japanese Yen has gained in a major way in light of these events representing an unwinding in the carry trades and the uncertainty in the global markets. Judging from the charts, the daily trend lines for the majority of Yen crosses have been breached and the eventual decline of the DOW below the 13,000 mark stipulating further drops will continue in the near foreseeable future. Below is a USD-JPY daily chart:

I fully expect price to decline to the lower depths at 107.00 regions which was a previous 6-mos low for the pair given that the continual chaos in Nigeria/Pakistan and Gold possibly running up another $20-30.00 on momentum as the majority of market makers will be returning from their long holiday vacations to participate in the rapid decline.

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