Currency correlation between Aud Nzd and Eur Chf

Hello everyone

A little update about myself, i just been retrenched from my previous job and i have just started my new job with NCS. I am still waiting for their clearence. without their clearence i cant do anything, and so i am basically doing nothing everyday for the past 2 months here. everyday reached late go home early, whole day do nothing but read my book and surf internet.
This is also why i been updating my blog so often, i cant waste my time here, so i bought my books and do my reseach here, people here think i am crazy. but i dun care abt them la. i keep writing my economics theory here in my blog.
life soooooo shiok here! if only i can do this kinda job everyday, then i no need to trade already, everyday i will love going to work.

ok now talk about forex correlationship
If you have been checking out currency rates or looking at forex charts, you would have noticed a strange similarities between Aud/Nzd and Eur/Chf. When ever Aud go up, Nzd will also go up. When ever Eur go down, Chf will also go down. isnt this strange? both are different countires but their correlation is almot >90%. when you look at them from a chart, it is almost like they are 2 mirror reflections.
Why is this so? i will try to explain this now.

Lets first start by saying a bit about history first. after the breaking of Bretton woods, which is a fix rate. Swiss Fran initally pegged itself to France Fran during the late 1970s. but shortly during 1980s, Swiss Fran then pegged itself to German Mark. After the formation of the Eur. Swiss pegged itself to Eur now.

Why does the Swiss Fran keep swithing pegging? from France Fran to German Mark and eventually now to Euro. The answer is logical and simple. It is because of Trade.
A example will be fisher man exchanging fish with farmers for crops. trade is the main reason why humans will gather together and live close to one another. this is how important trade is to mankind, in fact this is the reason why civilaization was created.

It pegged its currency firstly to France fran becuase France was then Swiss biggest trading partner. Then German became Swiss biggest trading partner, and now eventually it is the Euro as Swiss is right in the middle of Euro zone. It is the same reason too why Aud and Nzd have such strong currency correlation too. The strong currency relationship is due to the strong trading relationship between the two countries.

Now you might ask. so what if Aus is NZ main trading partner? why does it affect the currency rates? Well being their main trading partner ,it has a huge affect on the currency rates. This is because everytime aus wish to trade with nz. it must first check the currency rates. (read my another posting about Exchange limits). If their currency rates are being kept pegged together and their movement is very smiliar to one another. then the currency rates movement will not be a problem or an barrier whenever they wish to trades. To archieve this type of correlationship, the countries involved must be commited to maintain such a relationship, actions need to be done by the respective central banks to maintain the rates and make sure it does not go out of equilibrium.

A country will tend to trade primarly with neighbouring countries. Transport cost will means that a country will trade more with its neighbours and less with distand countries. The profits of trading are reduce by transportation cost. Transportation is a obstacle to trade.

if two countries become mutually dependent on each other for important resources and commodities, then it becomes more diffcult for them to separate their economics against each other. Because extensive trade relations require frequent contacts.



Ok now comes the next questions, If their trading relationship is so close and their currecny movement is almost the same, then why not just form one currency? why still need two different currency?

Ok to answer this question lets again go back to history.
Shortly after Bretton woods, the European Monetary System was formed (EMS). Until 1992 there were 9 full members (Belgium, Denmark, France, Ireland, Italy, Germany, UK, Netherlands and Luxembourg) Members agreed to maintain the exchange rates within one another.

The EMS Bundesbank was tightening rates in 1991-92 to tackle inflation, just as UK was entering a recession. The conflict between the EMS raising rates to tackle inflation and UK wish to lower rates to tackle recession, eventually force UK to leave EMS and return sterling to a floating exchange rate. Italy which was encountering similar problems followed UK a few days later.

There are lots of advantages of a single currency between close trading relationship countries but one huge disadvantage remains. Individual countries would not be able to use monetary policy or exchange rates to deal with different economic circumstances during business cycle.

a bit chim to understand becoz i just copied from economics textbook and never really rephrase them in lay man easy to understand terms.
but should be able to understand la, coz its simple logic nothing very difficult hehe

Snake Oil Salesmen

Hello

ok today i am going to talk about "Get Rich Fast" trading courses. The theory to this kind of business model is very simple. You do not even need to be a profitable trader or have a profitable trading system.

In fact, so simple that you see many adverts in the papers nowadays, options, FX, stocks, etc etc.

1) Dress well
2) Look Rich and successful with a story
3) Promise the sky
4) Charge a high fee for the course
5) Get the students to open trading account with affiliated firms
6) Generate Introducing Broker fees from (5)

Income is generated from 4,5 and 6, especially 6 is a recurring income

Its true you can make money from either market going north or south.
So some of the students will go north, some south. 50% will make money.
Of these 50%, half of them will make money again.

Some of these will be made as "success stories" to attract more people to join, with the dream to be millionairs and get out of the rat race. The rest are probably too ashame to admit they lost money, nobody like to admit that they are losers.
They blame it to bad luck/time, or wonder if there is something wrong with themselves. Wondering if they broke some trading rules set by the trainers. There is easily 1001 rules, enough to fill a whole A4 size page with more rules being added each week. How not to break a rule? Of those who saw the light, there is nothing they can do, when they tried to warn others. They were sued and classified as negative losers or not serious traders.

Even those who initially made money will eventually lose, unless they found the holy grail to read the markets (less chance than kena Toto). I also know there is a sucker born every minute, which is why you see so many snake oil scammers adverts that do not comply to MAS laws and regulations, EVERYDAY.

Yes, you can make money in FX, options and stocks trading, but you have to be a broker or trainer or introducing broker and that is a very stressful and full time job.

Lastly, however promising it looks, do not part with your money for the course. I myself wanted to quit my job and took up the course, paying about $10K for them and investing a lot more, thought i can learn trading to get rich fast. Back then close friends tried to warn me but i ignore them. So experience was my best teacher.

Just like experience will be the best teacher for you the readers of my blog, as I can sense that you too will jump in.

Those who can, TRADE. Those who can't, TEACH. Those who don't know, get CONNED

Nobody will give or sell away the golden goose that lays the golden eggs

Hope this helps, and if you guys do it, may the year of the OX be kind to you.

Understanding the Enermy

Hello everyone

After the previous few bullshit postings, people must be thinking that i am some kinda childish bo liao nutcase. Maybe i am. Ok so now the self proclaim xiao guru think he should give some "guru" talks.

To be profitable in the FX market, we must first understand what FX is all about.
FX is all about economics, it is very boring and dry so i wont go into too much details, and i am keeping things very simple. my views are based on my own trading theories research and i ignore other textbook theories/economics models that are not
helpful in my research. i am not an expert in economics or finance, anyone thinks i am not correct in any way, do let me know. i am of course not perfect. this is just my own understanding of the fx market.



What is FX?
Unlike the various bond and equity markets, the Forex market is not generally utilized as an investment medium. While speculation has a critical role in its proper function, the lion’s share of Forex transactions are done as a function of international business.

A brief history of FX.
Gold standard > Bretton woods > flexible "free float" exchange (current)
Each central banks determine its own interest rates and monetary policies, and lets their currency float in the exchange.Some countries have a semi peg currency

Why is fixed forex exchange rates policy like bretton woods and gold standard eventualy removed?
The reasons to fixed or peg a currency are linked to currency stability. However a lack of monetery and economics flexiblity proves too rigid and often leads to speculative attacks. while it did work at that point of time, but as times goes by, different countires undergo different economics cycle, conflicts and events arose and eventually major players involved in the agreeement will break off as history had shown. eg Bretton woods, Gold standard, etc

Why is a flexible foreign exchange rate prefered?
Allowed respective monetary authorities to follow more country independent fiscal polices to look into their current account imbalances. Using the flexible currency rates to absorbe or transfer financial shocks and unexpected events, monetary authorities aims to creating equilibrium within the country and in the international market.

Although our current foreign exchange is call the flexible exchange rate system, this does not mean that monetary authorities and goverment remained on the side lines and do nothing. In fact the monetary authorities and goverment had intervened heavily in the foreign exchange market, buying and selling foreign exchange in order to influence the movement in the exchange rates. We do not know why or when goverment intervene. Could be 101 reasons, they might think the currencies is too high/low/volatile. All we know is their role is to ensure that their country exchange rates is stable and they do intervene frequently.

What is the structure of the FX markets?
Fed > Central banks > Tier 1 banks > Tier 2/ECN > Market Makers/Brokers/Tier 3 banks

What is the role of the central banks?
The main role of the central banks is to provide liquidity to daily transactions, and to ensure that the country currency is not too volatile or over/under valued. To prevent the currency from being attack by speculators or hedge funds. Based on the current economics situations, central banks decide on the country interestes rates. tackling issues like inflations, deflations, balanceof payment, equilibrium, etc. Banks perform such tasks by directly intervening in the currcency market, buying/selling their own currency. To do this they need large amount of reserve/gold. This is why each central bank hold such large amount of reserve in gold or USD.

Who are the main players of FX? why does FX curencies flactuate?
They are of course the central banks, hedge funds, goverment and normal daily tractions mostly by internation business transactions resulted in a random movement of intraday exchange prices based on supply and demand.

There are serveral theories about the movement of curriencies such as interest rates, purchasing power parity, economics data, events, etc. I feel i don't need to know in detail as these are just theories, not really helpful in trading as there are all based on hind sight or long term.

FX market being so important to a country economics, why does banks/brokers even allow non-bank participant like me to speculate on it? doesnt this causes unnecessary movement and volalitiy?

As a byproduct of transacting all this business, bank developed the ability to speculate on the future of currency rates. Utilizing a better understanding of the market, a bank could quote a business a spread on the current rate but hold off hedging until a better one came along. This process allowed the banks to expand their net income dramatically. The unfortunate consequence was that liquidity was redistributed in a way that made certain transactions impossible to complete.It was for this reason and this reason alone that the market was eventually opened up to non-bank participants. The banks wanted more orders in the market so that
a) They could profit from the less experienced participants (only 10% of traders win)
b) The less experienced participants could provide a better liquidity distribution for execution of international business hedge orders.
Initially only megacap hedge funds (such as Soros’s and others) were permitted, but it has since grown to include the retail brokerages and ECNs.

Ok thats all for now, i will add on more here if i find something useful. I leave you with this quote from Sun Tzu Art of War

"If you know the enemy and know yourself, you need not fear the result of a hundred battles".