6.05.2009

Carry Interest is Rising But a Lack of Risk Doesn't Translate Into Strong Fundamentals

• Carry Interest is Rising But a Lack of Risk Doesn’t Translate Into Strong Fundamentals
• Central Banks Keep Rates Unchanged Yet Policy Officials Cautious
• Growth is Emerging as the Underlying Driver of Market Sentiment

Event risk was torrential this past week with a round of central bank rate decisions that covered both the most hawkish and dovish extremes of the policy scale as well as a slew of headline growth indicators. Naturally, one would expect extreme volatility and the establishment of new trends from this mix of fundamental fodder; but instead, we have seen exactly the opposite. The presence of so much event risk has frozen risk trends as market participants wait to absorb the releases rather than trading against a potentially influential event or piece of data. Since this week started with growth numbers on Monday and will end with US NFPs on Friday; there has is a consistent damper on swells in risk appetite. This has been seen across all of the capital markets. The S&P 500 has stalled below 950 just after hitting a seven month high; gold’s advance has seized within $10 from once again testing $1000/oz; and the Carry Trade Index has pulled back after a brief incursion to highs not seen since before the height of the financial crisis last October. It is not a stretch at this point, that this is merely a break within a rather momentous bull trend. However, looking back further than just the past three to six months, there is reason to believe that this advance could also be a correction in a much larger trend. The Carry Index is still nearly 28 percent off its record highs. It is unlikely that we will see the level of sentiment that preceded the crisis for a long time.

It is hard to be skeptical in a bullish market – much harder than doubting a long-term decline. Investors are hard-wired to buy assets as they find their way into the market. However, there is a difference between an influx of capital into the market and the appreciation an asset enjoys when speculation supports its strength. Sidelined money is returning to a market space that has shrunk (reducing the opportunities for liquidity) and the pool itself has been severely diminished through the market collapse and global recession of the past few years. Eventually, the market will bear as much of the risk-seeking capital as participants are willing to invest (unless another crisis unexpectedly arises); and then fundamentals will to come back into view. The burden of risk has not completely dissipated. The grip of recession is still tight (even if there are signs its pace is slowing) and the eventual recovery will be fraught with difficulties. Upon the recovery, government’s will have to unwind their aid, which restrict credit and saddle the market with toxic debt that is currently being held on the central bank’s accounting books. Widening rates on US mortgages and TALF loans are already showing signs of strain. What’s more, a revival of investment will require attractive returns. With central banks maintaining interest rates near multi-decade lows and keeping open the option to further loosen policy and expand quantitative easing; it is clear that there is little hope to see a significant increase in yields anytime soon.

Written by John Kicklighter, Currency Strategist
Article Source - Carry Interest is Rising But a Lack of Risk Doesn't Translate Into Strong Fundamentals
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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!