RR - FX STRATEGY – Trading Economics – EUR/USD – March 2015
Introduction:
Because the forex market place is all about the value of one currency relative to another
currency, all forex trading takes place in currency pairs. Today, seven currency pairs
represent about 85% of all forex trades:
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EUR/USD
USD/JPY
GBP/USD
AUD/USD
USD/CHF
USD/CAD
NZD/USD
If you study this list for a moment, two things will become clear. One is that the
countries shown here represent some of the world’s largest economies. The other is
that US dollar is a part of every one of the SEVEN MAJOR PAIRS [G7], making it the
most traded currency worldwide.
The reason these seven pairs are the MAJORS is simple; the economic power.
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European Union: 26%
United States: 23%
Japan: 9%
United Kingdom: 4%
Canada: 2%
Switzerland: 1%
Together, these seven countries generated 68%, or two-thirds, of the world economic
activity! Currency value and economic strength are intimately related.
The global forex market is massive. Daily trading volume is currently equal to about $4
trillion – and again, that is Daily Volume. By comparison, the US gross domestic product
(GDP) for the year 2010 was $14.5 trillion. And as per McKinsey Global Institute report
– at the end of 2010, global equity (stock) market capitalization and outstanding bonds
and loans represented $212 trillion. In other words, the world’s total financial value
changes hands on the forex market every 50 days!
Regardless of the source in FX trading – the greatest benefit of this massive trading
volume can be summed up in one word: LIQUIDITY. If you own land or a house, you
can sell it, but doing so will probably take weeks or months. If you own a Picasso or
Renoir painting worth millions, you can sell it too, but doing so could even take years.
Neither real estate nor collectible art is considered liquid asset in that they cannot
readily be exchanged for cash.
The tremendous amount of currency changing hands every day means there are plenty
of buyers and sellers in the market. This is a part of what makes trading exotic pairs
riskier – liquidity is much lower for low-demand currencies than for the majors, in the
same way that IBM and Apple stocks are more attractive than penny stocks.
It has really been the advent of the Internet that has permitted individuals to participate
in the forex markets.
As I mentioned that forex trading is in many ways simpler than equity trading, since
there are fewer currency pairs [7 Major] than there are stocks [1,000s]. It is also
important to understand that currency prices move differently. While a stock can climb
or fall within a huge range [10%] – currencies, by comparison, tend to move within a
relatively narrow range [1%]. This is because each currency represents economic
condition of the home country, which will only vary so much in a short period of time
within the global economy. And because central banks intervene to affect valuation in
the event their currency becomes too strong or too weak.
There are certain fundamentals that affect currency value and fundamental analysis is
geared more for long term trading. Technical analysis tends to be more appropriate for
short term trading. Much of the forex trading by speculators is based on technical
analysis.
There are two basic approaches to formulating forex trading strategies:
 Technical Analysis
 Fundamental Analysis
Fundamental analysis looks at these issues to making trading decisions:
 Interest rates [plus inflation],
 central bank policies
 Economics
In this way, it is similar to analyzing the financial statement of a company when deciding
whether to buy its stock.
Because of the nature of the underlying mechanics, fundamental analysis is geared
more for Long Term trading. Technical analysis tends to be more appropriate for shortterm trading. However, it is possible to combine aspects of both. For example,
fundamentals might indicate the future course a currency is likely to move. The
technical indicators can provide the signals to show when that movement is beginning.
There are two basic approaches to formulating forex trading strategies:
 Technical Analysis
 Fundamental Analysis
Fundamental analysis looks at these issues to making trading decisions:
 Economic Growth
 Central Bank Policy
 Interest Differential
In this way, it is similar to analyzing the financial statement of a company when deciding
whether to buy its stock.
Yield advantage is not the only factor. You need rising yield [differential] in the target
currency too. Growth + Yield = Gains.
Mostly FX Gain is driven by three factors:
 Growth Differentials
 Interest rates differentials
 Central Banks policy differentials
One important factor that distinguishes forex from equities is the role of Central Banks.
While companies take actions [increase revenue, cut cost, issue dividend] to effect the
price of their stock, in most cases they have little power to affect it substantially; the
market makes those decisions. A currency, however, is not something to be traded in
the market place; it is the economic lifeblood of a country. Valuations that are too strong
or weak have real important impacts on the economy, so each central bank is charged
with governing its currency.
Central banks manage/intervene the relative strength of their currency against others
because overly strong and weak currencies have negative economic effects. A strong
currency makes a nation’s export more expensive. A weak currency may increase the
price of imported goods and thus inflation.
Because of the nature of the underlying mechanics, fundamental analysis is geared
more for Long Term trading. Technical analysis tends to be more appropriate for shortterm trading. However, it is possible to combine aspects of both. For example,
fundamentals might indicate the future course a currency is likely to move. The
technical indicators can provide the signals to show when that movement is beginning.
A technical rally is one thing, but validation by fundamental makes for a strong trend.
When strong fundamentals support and validate a technical trend, the result is generally
a continuation of the trend. When it comes to currencies, trends can last a very long
time.
EUR/USD
The dollar hasn’t had this good a year since the Berlin Wall fell, Taylor Swift was born
and the World Wide Web was conceived.
(1). Economic Growth Differentials:
(2). Interest Rates Differentials:
(3). Central Bank Policy Differentials:
Global central banks to support strong USD
· Central bank policy to be an important driver of FX in 2015
· Fed expected to enter a cautious and data dependent interest rate hiking cycle in Q2 2015
· The ECB is expected to turn to increasingly accommodative policy
Monetary policies diverge
The ‘Divergent’ World of 2015
The U.S., its economic recovery firmly established despite learned talk of secular
stagnation, is looking Dauntless. The monetary-policy part seems simple: Stay long on
the dollar, short the euro.
(4). Balance Sheet:
(5). Central Bank Reserves:
(6). Inflation
(7). EUR/USD:
(8). USD:
(9). Purchasing Power Parity (PPP) Valuation:
(10). CFTC Positions:
Prediction for EUR/USD: