eToro – Forex Trading Forum

[BlueinGreen]

good morning traders

Yesterday the dollar started gaining substantially after U.S Treasury Secretary Henry Paulson voiced support for the currency and the president of the Federal Reserve Bank of Philadelphia said interest on the dollar rates should be raised.

This is a very important signal for us as traders. We are learning that American policy makers are growing more and more uncomfortable with the current dollar levels, and are worried from further decline in the dollar's value. This is despite the recent fears of further economic slow down.

To those of you who do not know : When a country's economy is slowing down, the central bank is usually lowering interest rates (and not raising ) in order to support all sectors of the economy to invest.
On the other hand – the action of raising interest rates is the main tool in the hands of any Central bank to fight inflation.

So this is basically the dilemma the Federal Reserve has to deal with right now – keep rates unchanged-to address economic slow down? or raising rates to fight inflation , weak dollar and high oil prices?

bottom line : what was said yesterday by the officials – increased the chance for an interest hike on the dollar this year.

on the technical side:
the USDJPY is advancing well towards a very important resistance area at around 108.5, a clear break of this level would confirm the new bullish major trend of this pair.

EURUSD is headed to its middle range area, the first support level is 1.5783, the second .is 1.5620

Main events today (GMT times )

12:00pm CAD Core CPI m/m Forecast 0.2$ Previous 0.3%

10:00pm NZD Monetary Policy Statement

10:00pm NZD Official Cash Rate Forecast 8.25% Previous 8.25%



Monetary Policy Statement= is the primary tool the RBNZ uses to communicate with investors about monetary policy. It contains the outcome of their decision on interest rates and commentary about the economic conditions that influenced their decision. Most importantly, it projects the economic outlook and offers clues on the outcome of future rate decisions;

Happy Trading

[piphunter]

– the action of raising interest rates is the main tool in the hands of any Central bank to fight inflation.

hi blueingreen ,
how do you trade ? using technical analysis or fundamental ???

[MannieNL]

BlueinGreen, you said:

When a country's economy is slowing down, the central bank is usually lowering interest rates (and not raising ) in order to support all sectors of the economy to invest.
On the other hand – the action of raising interest rates is the main tool in the hands of any Central bank to fight inflation.

So this is basically the dilemma the Federal Reserve has to deal with right now – keep rates unchanged-to address economic slow down? or raising rates to fight inflation , weak dollar and high oil prices?

Isn't there any other way to fight inflation in then raising the interest rates? If so, why does the Federal Reserve Bank not chose that option? It would make us dealing with finances less nervous and the economy more stable, I believe.

I did not quite understand however how this (raising or lowering of the interest rates) would affect specifically the EUR/USD relation.

[BlueinGreen]

hi blueingreen ,
how do you trade ? using technical analysis or fundamental ???

piphunter

as a trader i always base my trades both on technical and fundamental analysis.
I think it is a mistake to disregard any one of the two. From my experience, the Forex market moves according to fundamental and technical factors together.

A good example to this would be – lets say a report came out today with some bad numbers for the dollar, the EURUSD will start to go up as dollar will be weaker, but many traders that took a long because of the bad news – will want to take their profit somewhere , there is a good chance they will open a chart and start to look for a good technical exit , when all traders look at the same chart and recognize just about the same resistance level for selling EURUSD ( cover position and take profit)– that would be the level the EURUSD will correct it self , the correction is a purely technical move while the initial advance up of EURUSD was created by a fundamental reason.

A good trading system – even if it is purely technical can not overlook fundamental factors that are changing with time.

[BlueinGreen]

MannieNL

The main tool to fight inflation in a modern economy is monitoring interest rates.
A century ago, governments did not tend to intervene with markets as they believed that all problems will be solved automatically by the forces of supply and demand. The great depression of 1929 has thought the world otherwise. today every country has a central bank who is in charge of this decision process.

in order to explain it simply without getting into too much theory, think of inflation as a factor which reduces the value of a currency against it self – for example, last year you had to pay $100 for a television, and there was inflation of 5% that year , so today you would have to pay $105 dollar for a new T.V. The value of televisions has not change but the value of the dollar did –
1 dollar is worth less than it was a year ago.

basically interest rate is the payment you get for the time value of your money- you put your money in a bank for 1 year and you get payed interest rates. the higher the interest rates on you currency the more attractive it becomes to you compared to other alternatives –the demand for the currency will be higher and thus its value will go up, against other currencies as well.

[yesman]

interesting !

[MannieNL]

MannieNL

The main tool to fight inflation in a modern economy is monitoring interest rates.
A century ago, governments did not tend to intervene with markets as they believed that all problems will be solved automatically by the forces of supply and demand. The great depression of 1929 has thought the world otherwise. today every country has a central bank who is in charge of this decision process.

in order to explain it simply without getting into too much theory, think of inflation as a factor which reduces the value of a currency against it self – for example, last year you had to pay $100 for a television, and there was inflation of 5% that year , so today you would have to pay $105 dollar for a new T.V. The value of televisions has not change but the value of the dollar did –
1 dollar is worth less than it was a year ago.

basically interest rate is the payment you get for the time value of your money- you put your money in a bank for 1 year and you get payed interest rates. the higher the interest rates on you currency the more attractive it becomes to you compared to other alternatives –the demand for the currency will be higher and thus its value will go up, against other currencies as well.

so that's why you see the USD going up in value - meaning you get less dollars for a euro then before - recently?

[BlueinGreen]

so that's why you see the USD going up in value - meaning you get less dollars for a euro then before - recently?

no,
if the USD is going up in value, then you will get more dollars for a Euro ( not less).

and when we talk about predicting the value of the dollar ( or any other currency) , we usually place our prediction in a time window, especially if we are forex traders.
The value of the dollar will go up when? today? tomorrow? in a week? or in a year ?

every forex trader is trying to gain some profit in the market while working in a specific time frame – many traders are only interested in short time trading – entering a trade and exit it at the same day-- they care less about what will happen in a week or two, and concentrate more on what is going on right now in the market. Other traders like to hold positions open for weeks, months and even years, as they carefully plan their investment according to their view on future economical changes in the world.

However both kinds of traders -the short term and the long term trader, must be aware of the fundamental overview of central banks towards interest rates – since these are the best indication as to how the market is going to react to every situation.

i am happy that you are asking these questions, it is the best way to learn and develop in the forex world.

[MannieNL]

so that's why you see the USD going up in value - meaning you get less dollars for a euro then before - recently?

no,
if the USD is going up in value, then you will get more dollars for a Euro ( not less).

Heh. I got confused. I think I understand it now: When in 2004 one dollar was one euro, you got for 10 euro 10 dollar.
When in 2008 1,5 dollar was one euro, you got for 10 euro 6,7 dollar. Decline in value of the dollar = more dollars for those exchanging euros for dollars.

Can I state the following as well?
For US consumers, products seem to become more expensive with a value decline: a jeans would cost 100 USD in 2004 and 150 USD in 2008. With an increase of the value: a jeans would cost "less" again. I'm saying seem and "less" as income for the US consumer will also be adapted to the value of the USD of course and therefore it might not make any difference to the americans.

and when we talk about predicting the value of the dollar ( or any other currency) , we usually place our prediction in a time window, especially if we are forex traders.
The value of the dollar will go up when? today? tomorrow? in a week? or in a year ?

every forex trader is trying to gain some profit in the market while working in a specific time frame – many traders are only interested in short time trading – entering a trade and exit it at the same day-- they care less about what will happen in a week or two, and concentrate more on what is going on right now in the market. Other traders like to hold positions open for weeks, months and even years, as they carefully plan their investment according to their view on future economical changes in the world.

However both kinds of traders -the short term and the long term trader, must be aware of the fundamental overview of central banks towards interest rates – since these are the best indication as to how the market is going to react to every situation.

The short term traders seems to me as less vulnerable to interests rates changes then long term traders.

i am happy that you are asking these questions, it is the best way to learn and develop in the forex world.

Yes, I am very new to the forex market and though I had some economic classes a long time ago at school; most I forgot. Also, I remember that I got often confused with how the values differ between each other in case of decrease or increase of the value of a currency and that in relatin to import and export or other currencies. I know that that is dangerous on the forex market. Perhaps you have some advise for me how to remember this well. :)

[forexBull]

I remember that I got often confused with how the values differ between each other in case of decrease or increase of the value of a currency Perhaps you have some advise for me how to remember this well. :)

Mannie, maybe I can help you with this,

You see, every time we look at a currency pair like EURUSD, than we look at the first currency as the one which is always worth 1 unit of money compared to the other. For example the EURUSD is now 1.500, this means that 1 euro is worth 1.5 dollars.
Another example AUDUSD is traded at 0.9500 this means 1 Australian dollar is worth 0.9500 dollars ( less than one dollar).

And to your question:
If for some reason the value of the Euro is going up , than for 1 EUR you will get more dollars- because its value is greater, this means the EURUSD will go up. Instead of getting 1.5 dollar for 1 euro, now you will get 1.6 dollars.

If the value of the dollar will go up, than you will get less dollars for every EUR you have, this is why in this case EURUSD will go down.

If the value of the dollar is going down, than for every EUR you get more dollars, and once again the EURUSD will go up.

Hope it is clear now.

[MannieNL]

Thank you.