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Thursday, January 13, 2011
Wake-up Call - Macro Kickoff: will Portugal be mentioned by the ECB today?
Wake-up Call - Macro Kickoff: will Portugal be mentioned by the ECB today?

Focus will be on the Bank of England and the ECB today and the markets will look for any hints from the latter about the situation concerning Portugal.
Focus will be on the Bank of England and the ECB today and the markets will look for any hints from the latter about the situation concerning Portugal. The calendar features U.K. industrial production and U.S. producer prices, both of which are expected to increase. Trade data for the U.S. is also released and should show a slight widening of the deficit.
BoE, ECB rate announcements
Portugal’s successful auction yesterday saw risk rally and while we maintain our stance that Portugal will sooner or later apply for a bailout package perhaps we can concentrate on other events today than the constantly reappearing European sovereign debt concerns.
Both the ECB and the Bank of England will announcement rates today, but neither is expected to provide much action, we believe. The central banks will keep rates at 1% and 0.5%, respectively, and in the case of the latter the asset purchase target amount will remain at £200 billion.
The BoE should not change its monetary policy stance until a clearer picture of the economy is available given all the changes this year including a VAT increase to 20%. The ECB’s Trichet is also not expected to say much we don’t already know which includes potential questions about a Portuguese auction where the President of the ECB will maintain that any prospective bailout applicants have to make the first move.
U.K. manufacturing sector to improve
The PMI Manufacturing survey last week confirmed similar surveys from the U.S. and Eurozone, namely that the manufacturing sector of these economies continues to perform well. The overall index in the survey rose to 58.3, the highest in a decade, and has provided the markets with the ammunition needed to forecast that today’s report on industrial production while show that production rose 0.5% month-on-month in December.
 U.S. producer prices expected to rise, trade deficit to widen
Turning to the U.S. producer prices are set to rise yet again helped by the surge in energy in December, a month which saw Crude rise 8%. Following November’s 0.8% month-on-month change in prices, we expect prices are the producer level to show another gain of 0.7% (consensus: 0.8%) while core prices should also improve by 0.2%.
 The disappointing wholesale inventories report earlier this week suggests that the contribution from inventories in the fourth quarter may be smaller than previously expected (tomorrow’s business inventories report should help clarify that), but on the other hand trade data has been kind to the U.S. in recent months and even though we look for a slightly increase in the deficit to $40 billion, net exports looks on track to boost GDP in the fourth quarter.

Equity Kickoff: Higher on Intel expectations
European cash indices will open higher Thursday lead by a general strong expectation for the upcoming earnings season and today’s release from Intel is expected to boost that sentiment.
In terms of planned data events look for BoE and ECB interest rate announcements at respectively and especially Trichet’s wording in the follow up conference. Trichet is widely expected to comment on the Portuguese situation.
Equity markets will focus on Intel earnings and the conference call afterwards. There is no release time, but earnings are expected to show an increase from 0.440 USD per share in Q3 to 0.530 USD per share in Q4. This is to a large extent driven by sales growth as sales growth is expected to increase from 10.72 bln. USD to 11.36 bln. USD. Intel’s own guidance for Q4 sales is 11.40 bln. USD. The really interesting issue with Intels sales growth is where it is located; in Q3 sales growth was all coming from emerging markets, but this time around we do expect to see some of it origin from the U.S. If this is the case this will strengthen our belief that the U.S. is in for a strong recovery this year where we expect a GDP growth of 2.7%.
Lately there has been talk of a bailout of Portugal from EU/IMF. In our view there is a great likelihood that this will be the outcome of the current situation for Portugal. Trichet is not expected to move interest rates in either direction for a long time, neither is the BoE for that matter. But llisten carefully to the ECB press conference where we expect Trichet to indirectly comment on the situation in Portugal, pointing toward whether it will receive a bailout. If that should be the case, then expect markets to start testing Spain. As we have said several times now, Spain is a whole different story; it is a BIG economy. So big that if the bond investors really put pressure on the Spanish government bonds you should expect EURUSD to drop and equity markets, at least in Europe, to drop too – whether we are in an earnings season or not.
In today’s trading we are bullish on tech companies as we expect solid earnings from Intel – so look for STMicroelectronics. JPMorgan is out with earnings tomorrow and here we expect a surprise to the upside, so we are still positive on JPMorgan, Goldman Sachs and UBS. It is widely expected that due to QEII the fixed income trading divisions will drive earnings higher like they did the last time around when QEI was hitting the street. Commodity producers continue to rise in Asia, so look for Rio Tinto and BHP Billiton.  AUD (13) AUDJPY (5) AUDUSD (33) Brian Hunt (10) Brian Hunts Market Notes (10) CAD (12) CADNOK (2) Calculating Profit and Loss (1) Chart Of the Week (9) CHF (5) CHFHUF (1) Chinese Economy (16) Chinese Economy 2009 (2) Cocoa (1) Commodities (33) Commodity Trading Tips (7) Copper (4) Corn (4) Credit Markets (1) Crude Oil (61) Currancy Markets (4) Double Your Money (2) Dow Theory (2) Economic Data Highlights (8) Economic Updates (23) Energies (8) Equities (2) ETF (2) EUR (39) EURAUD (4) EURCHF (4) EURGBP (13) EURJPY (10) EURNOK (6) Euro vs Dollar (4) EURUSD (39) Financial Forecast (155) Financial Forecast 2010 (26) Financial Market (87) Forecast (21) Foreign Exchange Markets (4) Forex (24) Forex Commentary (23) Forex Forecast (89) Forex Market Drivers (2) Forex Market Update (155) Futures (3) FX Closing Note (38) G20 (2) GBP (19) GBPJPY (4) GBPUSD (10) GLD (48) GOLD (110) Gold Bull (15) Gold Forecast (38) Gold Forecast 2009 (17) Gold Trading Tips (17) Hot Market of the Week (4) Housing (8) How to Trade (2) Inflation (2) JPY (30) KOF (1) Leverage and Margin (1) MAJOR HEADLINES (2) Market Comments (23) Natural Gas (22) NOK (1) NZD (8) NZDJPY (3) NZDUSD (7) Oil (23) Oil N Gold Focus (30) Oil Trading Tips (13) Precious Metal and Other Miners (12) Real Estate (15) Real Estate Tips (5) Retirement Plans (3) Silver (40) Silver Forecast (25) Silver Stock Report (19) Silver Trading Tips (9) SLV (10) SP500 (12) Stock Market Commentary (4) Stocks (10) Sugar (4) Technical Analysis (136) Trading Tips (15) Upcoming Economic Calendar Highlights (9) USD (59) USDCAD (18) USDCHF (6) USDGBP (1) USDJPY (27) Wake Up Call (21) Weekly Commodity Update (40) What is a FX Speculator ? (2) What is FOREX ? (2) Wheat (2) Why trade Forex ? (1) World Economic Update (47) XAU (5) XAUUSD (2) XLF (2) XLF/SPY (3)
Monday, February 11, 2008
What is FOREX ?
Foreign Exchange Market (Forex) is the arena where a nation's currency is exchanged for that of another at a mutually agreed rate. It was created in the 70's when international trade transitioned from fixed to floating exchange rates, and nowadays is considered to be the largest financial market in the world because of its tremendous turnover.
Introduction to Forex

All currencies are traded in pairs and each is assigned with an abbreviation.

Here are some of them (Table 1):

EUR Euro
USD US Dollar
GBP British Pound
JPY Japanese Yen
CHF Swiss Franc
AUD Australian Dollar
CAD Canadian Dollar
NZD New Zealand Dollar
SGD Singapore Dollar

Base currency is the first currency in the pair. Quote currency is the second currency in the pair.
USD / JPY = 120.25
Base currency Quote currency Rate

This abbreviation specifies how much you have to pay in quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese Yen for one US Dollar). The minimum rate fluctuation is called a point or pip.

Most currencies, except USD/JPY, EUR/JPY, CHF/JPY and GBP/JPY where a pip is 0.01, have 4 digits after the period (a pip is 0.0001), and sometimes they are abbreviated to the last two digits. For example, if EURUSD is traded at 1.2389/1.2394 the quote may be abbreviated to 89/94.

The currency pairs on Forex are quoted as the Bid and Ask (or Offer) prices:
Bid Ask
USD / JPY = 120.25 / 120.30

Bid is the rate at which you can sell the base currency, in our case it's US dollar, and buy the quote currency, i.e Japanese Yen.

Ask ( or Offer) is the rate at which you can buy the base currency, in our case US dollars, and sell the quote currency, i.e. Japanese Yen.

Spread is the difference between the Bid and the Ask price.

Pip is the smallest price increment a currency can make. Also known as a point. e.g. 1 pip = 0.0001 for EUR/USD, and 0.01 for USD/JPY.

Currency Rate is the value of one currency expressed in terms of another. The rate depends on the supply and demand on the market or restrictions by a government or by a central bank.

1.0 lot size for different currency pairs (Table 2)

Currency 1.0 lot size 1 pip

EURUSD EUR 100,000 0.0001
USDCHF USD 100,000 0.0001
EURUSD EUR 100,000 0.0001
GBPUSD GBP 70,000 0.0001
USDJPY USD 100,000 0.01
AUDUSD AUD 200,000 0.0001
USDCAD USD 100,000 0.0001
EURCHF EUR 100,000 0.0001
EURJPY EUR 100,000 0.01
EURGBP EUR 100,000 0.0001
GBPJPY GBP 70,000 0.01
GBPCHF GBP 70,000 0.0001
EURCAD EUR 100,000 0.0001
NZDUSD NZD 200,000 0.0001
USDSEK USD 100,000 0.0001
USDDKK USD 100,000 0.0001
USDNOK USD 100,000 0.0001
USDSGD USD 100,000 0.0001
USDZAR USD 100,000 0.0001
CHFJPY CHF 100,000 0.01

Spreads & Margins


Margin is the collateral required to open and maintain a position:

* 1% of transaction size for account balances below $ 100,000
* 2% of transaction size for account balances up to $ 250,000
* 4% of transaction size for account balances above $ 250,000

Balance is the total financial result of all completed transactions and deposits/withdrawals on the trading account.

Floating Profit/Loss is current profit/loss on open positions calculated at the current prices.

Equity is calculated as balance + floating profit - floating loss.

Free margin means funds on the trading account, which may be used to open a position. It is calculated as equity less necessary margin.
Calculating profit/loss

For example, EUR/USD exchange rate is 1.2505/1.2509 and your leverage is 1:100. You believe that EUR/USD will go up and buy 0.1 lot of EUR/USD at 1.2509 (Ask price) - for the contract size refer to Table 2. As we can see from Table 2, 1.0 lot of EUR/USD is 100,000 EUR, which means that 0.1 lot (our example deal size) is 10,000 EUR.

So, you buy 10,000 EUR and sell 10,000*1.2509=12,509 USD. In fact to fund this position you do not have to have 12,509 USD but only 125.09 USD. The rest of the money (in our example 12,383.91 USD) is leveraged to you by Alpari (UK).

Leverage (or gearing) mechanism allows you to open and hold a position much larger than your trading account value. 1:100 leverage means that when you wish to open a new position, then you need to support a deposit 100 times less than the value of the contract you are interested in.

For example, you believe that EUR/USD is moving higher and buy 10,000 EUR and sell 12,509 USD. Assuming you are right and EUR/USD goes up to 1.2599/1.2603 and you decide to close the position: when you close a long position you sell the base currency (10,000 EUR in our example) and buy the quote currency (10,000*1.2599 = 12,599 USD):
Transaction EUR USD
Open a position: buy EUR and sell USD + 10,000 - 12,509
Close a position: sell EUR and buy USD - 10,000 + 12,599
Total: 0 + 90

NB: When you close a short position you buy the base currency and sell the quote currency.

To fund this position you only need 100 EUR (approximately 125 USD) not 10,000 EUR. The profit on this position is 90 pips (1.2599-1.2509=0.0090). A pip or point is a minimal rate fluctuation. For EUR/USD 1 pip is 0.0001 of the price (see Table 2).

This example shows a favourable outcome. If EUR/USD had fallen you would realise a loss not a profit and with leverage this loss will be magnified. For example, if you close the position at 1.2419, your loss would be $90. Should you have doubts about your understanding of risks, please consult your financial adviser.

Lot Size is the number of base currency, underlying asset or shares in one lot defined in the contract specifications. For details refer to the Table 2.

Lot is an abstract notion of the number of base currency, shares or other underlying asset in the trading platform.

Transaction (or deal) size is lot size multiplied by number of lots.

Long Position is a buy position whereby you profit from an increase in price. In respect of currency pairs: buying the base currency against the quote currency.

Short Position is a sell position whereby you profit from a decrease in price. For currency pairs: selling the base currency against the quote currency.

Completed Transaction consists of two counter deals of the same size (open and close a position): buy then sell or vice versa.

Leverage is the term used to describe margin requirements: the ratio between the collateral and the value of the contract. 1:100 leverage means that you can control $100,000 with only $1,000 (1%).

As a result, positions are subject to a swap charge or credit based on the "Rollover/Interest Policy" webpage.


The cost of rollover is based on the interest rate differential of the two currencies. Let’s assume that the interest rates in the EU and USA are 4.25% p.a and 3.5% p.a respectively. Every currency trade involves borrowing one currency to buy another. If you have a buy position of 1.0 lot in EUR/USD, then you earn 4.25% on your Euros and borrow USD at 3.5% per year.

In other words:

* If you have a long position (i.e. bought) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you receive a gain.
* If you have a short position (i.e. sold) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you lose the difference.
* If you have a long position (i.e. bought) and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you lose the difference.
* If you have a short position (i.e. sold) and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you receive a gain.
Please note that if you open and close a position before 10:59:45 p.m. (London time) you will not be subject to a rollover.


The act of rolling the currency pair over is known as tom.next, which stands for tomorrow and the next day.

Why trade Forex?

Unlike other financial markets Forex has no physical location, like stock exchanges, for example. It operates through the electronic network of banks, computer terminals or via telephone. The lack of a physical exchange enables Forex to operate on a 24-hour basis, spanning from one time zone to another across the major financial centres (Sydney, Tokyo, Hong Kong, Frankfurt, London, New York etc). In every financial centre there are many dealers, who buy and sell currencies 24 hours a day during the whole business week. Trading begins in the Far East, New Zealand (Wellington), then Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Maine, London and ends in New York and Los Angeles. Below there are approximate trading hours for regional markets (London time):
Japan 00:00-06:30
Continental Europe 06:30-13:00
Great Britain 8:30-15:30
USA 14:30-21:30

Forex has some advantages which make it very popular among investors:

* Liquidity. Forex is the largest financial market in the world, with the equivalent of over $3-4 trillion changing hands daily whereas traded volume on the stock markets equates to only 500 billion US dollars.
* Flexibility. Forex is a 24-hour market, which offers a major advantage over other markets, for example, stock exchanges which are only open during regional business hours. You can respond to breaking news immediately if the situation requires it and customise your trading schedule.
* Lower transaction costs. Traditionally there are no commissions or charges on Forex, except for the spread.
* Margin. Our 1:100 leverage (only for deposits below $ 100,000) is a powerful tool. You need to support a deposit of 1,000 US dollars to make a deal with $100,000. Such high leverage combined with rapid rate fluctuations can make this market profitable but at the same time risky: please see Risk Warning below.

Risk Warning

Under margin trading conditions even small market movements may have a great impact on the customer's trading account. You must consider that if the market moves against you, you may sustain a total loss greater than the funds deposited. You are responsible for all the risks, financial resources you use and for the chosen trading strategy.

This information was provided by 2004-2007 Alpari (UK) Limited
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