6.12.2009

Carry Diverges From Risk Appetite: What are the Risks to a Market Recovery?

• Carry Diverges From Risk Appetite: What are the Risks to a Market Recovery?
• Outlook for Yields Starting Rising To Levels That May Compensate for Lingering Risk
• Will G8 Finance Ministers Discuss Spark Volatility?

Risk appetite in most regions of the financial market is still actively suppressed by skepticism over early growth warnings and concern surrounding the eventual unwinding of government support from a still fragile global economy. However, shirking the caution seen most prominently in the equities market, carry interest have surged this past week. Looking at the Carry Trade Index, a sharp 430 point rally this past week has pushed the gauge to retest the 10-month high set early last week. Why the divergence? The answer lies in the market conditions numbers. The DailyFX Volatility Index has shown a quick retreat from the aggressive rise in sentiment that transpired over the previous four weeks. This is in line with the deflated fear indicators for the other traditional asset classes (the VIX, junk bond spreads, credit default swaps, etc). More interesting, however, is the improvement in the other side of the traditional risk/reward balance in the market. While market sentiment is still the primary source of strength for most investments; there have been a few key changes to yields over this past week to support the traditional carry trade basket. Most notably, the RBNZ announced it would hold its benchmark unchanged at 2.50 percent and forecasts for RBA interest turned decidedly hawkish in the span of a few days. Is this shift in returns indicative of the larger currency market? No. However, when sentiment is balanced like it has been over the past few months, a factor like this can make all the difference in the world.

Sudden shifts in yield speculation or sentiment like we have seen this past week are critical for swing traders; but for carry interests, they can be a dangerous distraction. A stability in risk and return is essential for supporting the longer-term strategy. And, considering the evolution of fundamentals this past week, there is little reason to believe that optimism is on the verge of a sudden and complete return. To be sure, there were a few positive events to take account of. The two highest yielding, liquid currencies reported a positive shift in their respective rate forecasts. What’s more, the outlook for an economic recovery was furthered by a far smaller-than-expected drop in US payrolls. However, these are still dull readings in an overwhelming gloom. There is a consensus among policy officials and market participants that current recession will hold over for the rest of the year and that even the eventual recovery will be drawn out and slow. In fact, the World Bank today downgraded its forecasts for activity through 2009 from a 1.7 percent contraction in March to 3.0 percent slump. In the meantime, there are plenty of factors that could derail a recovery. Sovereign debt ratings, ballooning budget deficits, struggling financial institutions, diminishing confidence in safe-haven assets and the government’s eventual withdraw of its financial aid are all big ticket issues. The mention of any one of these at this weekend’s G8 meeting could substantially alter sentiment.

Written by John Kicklighter, Currency Strategist
Article Source - Carry Diverges From Risk Appetite: What are the Risks to a Market Recovery?
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.


The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!