OVERLEVERAGING — THE RISKS OF FOREX LEVERAGE

We have already discussed what leverage is, and what it offers to the trader. Let us here take a look at the impact overleveraging can have on trader psychology.

As we mentioned above, the best trader is he who can detach himself from his emotions during his trading activity: one can have as much excitement and joy as he desires while enjoying the fruits of his achievements, but during trading itself, the heart should beat softly, and the brain should be in charge. Needless to say, a high-risk, all-or-nothing environment where any slight mistake can wipe out the trader's capital is not the environment that is conducive to creating such a mentality. Mistakes will inevitably happen during trading; neither man nor machine is capable of predicting every movement of the market precisely. To ensure that the mistakes that occur do not eliminate your capital, your self-esteem, and your chance of learning from your errors, do not over leverage.

High leverage works against the speculator by increasing the stakes and making the heart beat faster. No one jumps in his seat over the loss of a couple of dollars through which lessons are learned and mistakes recognized. But as potential losses increase, the beginner will have no time to focus on the lessons from his deficiencies, but instead will agonize over his stupidity at having risked so much money in a bet that didn't possess much chance of success anyway. And there begins the vicious spiral of fear, and losses which can eventually ruin a good man's livelihood.

But if the reader is afraid of the large holes that leverage can open in his pockets, he should also keep in mind that there's nothing related to the forex market per se that is dangerous and harmful. Forex is perhaps the safest of all market, since in general the prices move very slowly, and unlike in the stock market, the wipe-out of an unleveraged account is almost impossible: let us remember that nations do not go bankrupt, and currencies don't go to zero in general. But because many people see forex as a get-rich-quick scheme, and expect nonsensical levels of leverage to work for them, more people fail in this market than those who succeed.

To hopefully clarify this matter even further, and to let the incredulous reader reconsider his opinion, I'd like to remind him that the bankrupt Wall Street firms of 2008, like Bear Sterns, Lehman Brothers, Merril Lynch, had leverage ratios of at most 35 to 1, even in the worst cases. And there doesn't exist a person in the world today who doesn't, in hindsight, recognize how foolish and irresponsible it was to take that much risk. But if leverage in the thirties was bad enough for the giant Wall Street firms, with US government and international backing behind them to recapitalize them repeatedly before they went bankrupt, or were forced into gunshot marriages, how wise can it be for the "average Joe" to leverage his account in the fifty or even a hundred to 1? Given that the forex market is erratic, and unpredictable in the short run, how much wisdom can there be in overleveraging?

Remember, if you can't create great returns at low leverage, there's absolutely no reason to expect to do so on high leverage, and every reason to expect massive losses instead.

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Fed Members Continued To See Tapering This Year, Despite The September Disappointment

Although the Fed failed to announce tapering in September, the FOMC minutes unveiled that most policymakers expect it to begin this year. The minutes showed that the Fed decision to not taper last month was driven by the tightening in financial conditions, uncertainty over the fiscal outlook and the ambiguous economic data released since the June meeting. Meanwhile, policymakers were divided into 2 camps when considering whether to taper with the first camp mainly concerning about whether economic conditions warranted tapering while the second focused on how the tapering decision would affect the credibility of the Fed monetary stance.

The minutes indicated that some members saw financial conditions as tighter and a risk from "sizable increases in interest rates' although the intermeeting data suggested that the economy was 'expanding at a moderate pace'. Meanwhile, 'household spending and business fixed investment advanced, and the housing sector was strengthening, but mortgage rates had risen further and fiscal policy was restraining growth'. Yet, others viewed that 'cumulative progress' in labor markets since the beginning of the QE warranted reduction of stimulus. They believed that monetary policy credibility would be 'best served by announcing a downward adjustment in asset purchases' at the meeting while any postponement 'of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications'.

Concerning the forward guidance, some members expressed the concerned that a 'delay could potentially undermine the credibility or predictability of monetary policy by, for example, increasing uncertainty about the Committee's reaction function and about its commitment to the forward guidance for the federal funds rate, with the result of an increase in volatility in financial markets'. The Fed members also 'discussed the potential for clarifying or strengthening the Committee's forward guidance' and the steps suggested include 'stating that the Committee would not raise its target for the federal funds rate if inflation was expected to run below a given level or providing additional information on the Committee's intentions regarding the federal funds rate after the 6.5% unemployment threshold was reached'.

Policymakers had a vigorous debate about whether to taper in September and how the process should work. It's stated in the minutes that 'a few participants expressed a preference for not cutting MBS purchases but reducing purchases only of Treasury securities initially, with the intent of continuing to support the recovery in the housing sector'. With respect to the economic projections, the minutes indicated that 'most participants viewed their economic projections as broadly consistent with a slowing in the pace of the Committee's purchases of longer term securities this year and the completion of the program in mid-2014'.

In short, the minutes were a dovish one. Yet, most member continued to expect tapering to begin later this year but economic data, especially those reflecting the labor market situation, are the deciding factors.

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TRADING PSYCHOLOGY

Human beings are emotional creatures. We love, we hate, we adore, worship and despise, we can be enthusiastic, and we can be cautious. The canvass of our lives is colored by the palette of emotions, and indeed it's impossible to define a human being without depicting his emotional reactions to life's various occasions.

To the better or worse however, the canvass of profit is colorless. Neither the blush of euphoria, nor the blues of depression have any bearing on the landscape of forex. The successful trader should attempt to banish the shades of pride from his heart when he succeeds, because the market is fickle, and quick to punish those who foolishly feel that they have "cracked the code of forex". But neither should the trader have any feelings of shame or sadness about his failures: failures pave the path of experience leading to success, and as long as he recognizes that he's not ready to embark on big risks, he can survive any calamity that the forex market throws on him by simply risking little, and employing low leverage.

And yet an enormous number of speculators have been unable to act by these simple principles. Desperation and excitement, greed and fear delude many people even after experimentation and study, and success in trading can elude even a genius like Sir Isaac Newton, if he's unwilling to fight his emotions, be deaf to the crowd, and follow the dictates of logic.

So we expect the trader to reason rather than feel, and to calculate rather than dream. We want to take emotions out of the deal, and we don't just want to remove those such as fear, apprehension, worry, anxiety from our trading experience, but also excitement, courage, euphoria, and the other so-called positive emotions, in order that we don't overestimate our skills and power and take more risk than we should take. How do we achieve that?

The only way of achieving this aim, and successfully managing our psychological responses during trading is understanding what we do, and doing what we understand.

Once the trader is aware that his success is not a gift from angels, and his failure is not bad luck, or karma, but the logical consequence of wrong choices and indiscipline, there will be little cause for any emotional ruin, or gratification. Success in the market should be as simple as a good meal enjoyed after hard work. And failure should be as harmless as the bite of a mosquito, because risking more in a highly leveraged trade will never grant anyone success: it is always possible to begin with small sums, gain confidence while scaling-in, and even those small sums will translate to great profits in time. And if they do not, what would make us think that adding to the account or changing leverage will change our fortunes?

And I'd like to repeat here once more in response to the many online get-rich-quick schemes that proliferate: success in the forex market, and in fact in all financial markets, is not dependent on knowledge of some secret formula, or some magic indicator, or a prodigious intellect: all that is needed is discipline and study. To study the causes of economical events, and understanding them, thereafter devising, or adopting a clear and uncomplicated technical method, and adhering to that with principle and discipline is all that is necessary for success. But it must be remembered that nothing more and nothing less will do either. And the trader should get rid of all dreams of overnight riches without labor: who knows, maybe overnight riches will be possible for some individuals, but even then not without hard work and reflection.

Let us examine two major problems that cause traders to lose their wits, and turn the forex market into some kind of Russian roulette where it is impossible to maintain calm during trade decisions: the problem of undercapitalization and overleveraging.

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Italy's Political Turmoil On Bonds And Cost Of ECB Funding

Political uncertainty in Italy again raised market concerns. Volatility is expected at least in the near-term as Prime Minister Letta might need to find sufficient support to remain in the government. An early election of the government cannot be ruled out although the likelihood is not high. Bond investors are mostly concerned about the impact on credit ratings of Italy's sovereign bonds. With all of S&P, Moody's and Fitch putting Italy in negative outlook and ratings marginally investible, a downgrade would cause huge liquidation. Meanwhile, the potential haircut for the Italian government bonds by the ECB worsens the situation.

Silvio Berlusconi asked 5 ministers of its centre-right PDL party to resign last Friday, triggered by the government's failure to agree on budget measures needing to keep the general government budget deficit below 3% of GDP this year. The decision was described by Prime Minister Letta as “mad and irresponsible” as Berlusconi “solely finalized to cover his personal travails”. Note that Berlusconi lost a final appeal in a tax fraud case and is expected to begin a one-year prison sentence, most likely in house arrest, in mid-October. While Letta has not yet accepted the resignation, he has announced that he would ask for a vote of confidence in parliament in the next few days, possibly on Wednesday.

A number of possibilities can be expected in the consequence. With the mixed opinion about Berlusconi's call for resignation within the PDL, it might be likely that Letta would find sufficient support to retain a majority in parliament by gaining support from several PDL dissidents. If there lacks support of the parliament new government has to be formed or an early election would be carried out.

No matter which scenario materializes, market volatility is expected, at least in the near-term. Concerning the credit ratings, S&P, Moody's and Fitch assigned Italy with BBB (negative outlook) on July 9, 2013, Baa2 (negative outlook) on July 12, 2012 and BBB+ (negative outlook) on March 8, 2013 respectively. All of them stated at that time that political uncertainty was a key factor triggering the downgrade as it would affect implementation of structural reform. However, we expect the agencies would take a wait-and-see mode this time before making any adjustment. Any downgrade would strip Italy's bond off the investment grade, causing a number of funds to liquidate.

Canadian rating agency, DBRS, placed Italy at A-, with negative outlook on March 6, 2013. A downgrade would raise the cost of the Italian banks' funding at the ECB operations. In July, the ECB raised haircuts for Eurozone sovereign debt (Category I) by 0.5% to 2.5% for BBB+ to BBB- rated countries, while reducing haircuts on paper rated AAA to A- by 0.5%-1%, depending on the maturity of the bonds. Helped by the ECB's “first-best” rule, haircuts on Italian bonds are still low with DBRS' A- rating. A downgrade would put Italy's collateral into a lower category, hence raising the cost of borrowing.

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The Fed Wins a Pyrrhic Victory

So the Fed didn't taper, risk assets are rallying (although they are pulling back today in a post Bernanke hangover), and bond yields are falling. Perhaps the most important yield to fall is the 30-year mortgage rate, which fell back to its lowest level for a month after the Fed announcement. One of the reasons the Fed decided to stay its hand was because the prospect of tapering had caused the housing market recovery, which started in 2011, to stall. The housing market is huge in the US, not only does it create a large amount of employment and growth, i.e., retail sales are mostly made up of what people buy for themselves or to put in their homes, but it is also a key ingredient in consumer and investor confidence. If your house price is rising then you feel rich.

It's all about housing

So, a threat to this important sector of the economy could not be tolerated by the Fed. As you can see, the 30-year mortgage yield is still a full 100 basis points above where it was back in May, before Bernanke had riled the market with his taper talk to Congress. Thus, the Fed could take its time with tapering for as long as it takes the housing market to get back into recovery mode.

The Fed's pyrrhic victory

Essentially, the Fed didn't end up having to do anything yet it got the desired effects - back in May, by touting tapering, it helped life interest rates, thus averting bubble territory, now by refraining from tapering yields have backed away from recent highs. But Bernanke is no market Svengali, his move last night is still costing the Fed $85bn a month in asset purchases, the Fed's balance sheet is still enormous, at more than $3.6 trillion. QE-3 can't go on forever and tapering will happen, but right now the Fed is taking its time over ripping off the plaster. When will it have consequences? It depends when the size of the Fed's balance sheet become a problem. Will it be accused of monetizing the US's enormous debt when it hits $5 trillion, $10 trillion? Who knows, but the Fed is playing a dangerous game and will have to rip the plaster off the wound at some point and it won't be pretty.

The Fed does the ECB a favour

In contrast, Mario Draghi has managed to talk the Eurozone sovereign crisis down without spending a penny - the ECB's balance sheet has been shrinking rapidly since the start of this year and is 20% smaller than it was in January. In fact the Fed did the ECB a favour - the rise in Treasury yields since May had weighed on global G10 yields, pushing up borrowing costs for Spain, Portugal etc. These countries already have precarious finances, so rising borrowing costs were starting to cause some concern. Now that tapering has been put firmly to bed, yields in Europe's periphery have fallen.

Post FOMC ECB cheer could be short-lived

The biggest problem for Draghi could be a rising EUR. EURUSD jumped to its highest level since February post the FOMC meeting. Back in early Feb when EURUSD jumped above 1.3600 the ECB managed to talk it down by some 800 pips in 6 weeks. However, in the coming days, a win for Merkel, and for the FDP party, which would avoid a grand coalition with the Social Democrats, may drive a relief rally in EURUSD on Monday. However, if we make fresh 12 month highs in the coming days in EURUSD this increases the risks of intervention from the ECB at its October meeting.

The effects of the Fed bottling it on tapering last night could be felt for some time.

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A Surprise Move from the Fed

In a surprise move, the FOMC this evening refrained from scaling down its asset purchases. The market reaction was significant with the 10-year treasury yield dropping 15bp on the announcement and the 2-year yield 6bp, while equities rallied and the S&P500 rose 1.3%.

The overarching reason that the Fed opted to do nothing at the meeting is the recent tightening in financial conditions and, in particular, the increase in mortgage rates. Bernanke stated that the FOMC wants to be sure that the impact on especially the housing market does not bring economic growth out of sync with the Fed’s projections. Another factor mentioned is fiscal policy and the risks associated with the upcoming debate on both the debt ceiling and the 2015 budget. We have two meetings left this year in October and December. One month more of data is likely not enough to judge whether the tightening in financial conditions is derailing the recovery. It is also uncertain whether the fiscal situation will be much clearer end October. This favours waiting until the December meeting to taper.

Other factors supported the dovish feel. In particular, the new year-end 2016 forecasts showed both unemployment and inflation back close to their longer-term neutral levels, but the median projection of the Fed funds rate at only 2% up from 1% year-end 2015. This is basically in line with the market pricing ahead of the meeting and even slightly below. A neutral Fed funds rate is seen around 4% and the projections suggest that the average FOMC member is in line with vice chairmwoman Yellen’s statement, that the Fed funds rate should be kept much lower than what a Taylor rule would suggest. At the press conference, Bernanke explained that because of continued headwinds (slow housing market, continued fiscal drag, lagged effects from the financial crisis) he expected the Fed funds rate to remain below 4% for two-three years after 2016.

It is also worth noting that the QE plan Bernanke laid forward at the press conference following the June FOMC meeting was not reaffirmed. He did not mention the 7% unemployment rate threshold for ending QE, neither did he talk about mid-2014 as a likely end point. Rather, he used the more vague formulation "first step on tapering is possible later this year".

In sum, the FOMC is considering when to moderate its purchases and the decision remains data dependent - as the statement put it, "there is no preset course for asset purchases". In our view, however, the December FOMC meeting is the most likely candidate for a start to tapering.

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U.S. Economic Growth Holds Steady Amidst Political Uncertainty

The U.S. economy grew at a "modest to moderate" pace over the September to early October period, according to the latest Federal Reserve Beige Book. This is the same characterization of economic growth that has been in place since the end of April.

Consumer spending grew modestly in most Districts. Momentum remained strong for auto sales. Elsewhere, retail sales were characterized as "steady", with retailers remaining optimistic about the upcoming holiday season.

Residential construction increased at a moderate pace across Districts, particularly in the multifamily sector. Nonresidential construction on the other hand increased at a modest pace, but the outlook for commercial real estate was generally positive, amidst falling vacancy rates and rising rents.

Overall, business spending grew only modestly in most Districts, but several noted an improvement in capital spending plans.

Manufacturing activity generally grew at a modest pace, with the automotive and aerospace sectors representing a continued source of strength.

In terms of the labor market, employment growth remained modest, with several Districts reporting that employers were cautious given current fiscal uncertainty.

Key Implications

In the absence of most government data releases, the Beige Book takes on added importance in gauging the state of the recovery. The period covered by the survey includes the weeks leading up to, as well as the first week of the government shutdown. The fact that the characterization of the economy remains unchanged is a positive signal, underscoring resilience in the face of government furloughs and declining consumer confidence.

Overall, although the characterization of the economy remained unchanged, the tone of the report appeared somewhat more subdued relative to previous editions. A notable theme across different sections of the report was the issue of uncertainty, mostly from the government shutdown and debt ceiling debate, but also from the rise in mortgage rates. However, even with this degree of uncertainty, a number of forward-looking indicators remained upbeat suggesting that beyond the fiscal uncertainty, the underlying guts of the recovery remain intact.

With the news that the Senate has struck a deal to end the shutdown and raise the debt ceiling, political uncertainty should subside at least in the immediate term. To some extent, the damage is already done. Relative to our September basecase forecast of 2.6% real GDP growth in Q4, the shutdown will likely drag growth closer to 2% than 3%.

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FOREX MONEY MANAGEMENT

FOREX (FOReign EXchange market) is the international currency trading market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free floating currencies were adopted by most countries, and only the participants of the market determine the price of one currency against the other proceeding from supply and demand.

As far as freedom from any external control and free competition are concerned, FOREX is a perfect market. It is also the financial market with the highest liquidity. According to various assessments, the daily turnover of the market constitutes from 1 to 2 trillion US dollars a day. Transactions are conducted all over the world via internet 24 hours a day from 00:00 GMT on Monday to 10:00 pm GMT on Friday.

While other traders make complicated mathematical analysis or guess what to do, you don't have to be a financial expert to trade forex and achieve success like professionals do!

All you need is a Forex Automoney - the web service which will give you a detailed information about "what" and "how" to trade.

Now, all you have to do to make a trading profit, is to click one button (for example "Buy") and a moment later the other button ("Sell"). If the price of the chosen currency pair rises in the meanwhile, you can have a trading profit, and with the help of leverage, earn as much as 400 times more than the actual increase in the currency pair's price.

This way, with the tiny effort of a few clicks a day, traders can earn thousands or even dozens of thousand dollars per day

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Push Back of Fed's Tapering Schedule

As the Congress passed the bill to raise the debt ceiling and end the partial government shutdown, federal workers returned to work last Thursday. Yet, the 16-day closure has resulted in delays of a number of important economic data, including the non-farm payrolls. The political chaos has also pushed back expectations of the Fed's QE tapering. While failing to announce the schedule of QE reduction in September, the Fed raised the concern that it might be difficult to explain a QE reduction "in coming months absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties". What happened over the past 2 weeks has indeed made the October data release less clear that it should be, lowering the likelihood of any tapering announcement in October and even this year.

The release of the US employment report for September is delayed to October 22 (Tuesday) while the October report is delayed to November 8, a week later than previously scheduled. We doubt if the Fed would entirely trust the October readings as many of the data would have been missed. In previous government shutdowns, the survey collection rate for the initial employment report was abnormally low and the revision was large, creating big difference between preliminary and revised data. While the first estimate of the employment data might lack accuracy, the revised data would not be out until early December while preliminary November employment data would also be released around that time.

Such a timeframe suggests that the Fed would not find the data "clear" until early December, weeks before the December FOMC meeting. Yet, the Fed would usually need a few months of evidence to support its decision. With only one set of trustable data, the Fed would find it premature to announce a change in monetary policy even if the data are strong enough. This signals that the possibility of QE tapering in October is now off the table while that for December has been dramatically lowered.

The market had been increasing bets that tapering would begin in 1Q14. Yet, this coincides with the FOMC leadership transition. Fed Chairman Ben Bernanke's term would officially end on January 31, 2014. Yet, he might or might not choose to remain the chairman of the January meeting. Our view is that, if Yellen, assuming she is confirmed to take over Bernanke's role, is voted to chair the January meeting, the likelihood of a tapering in the month would be lowered.

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Beige Book Unveiled Businesses' Concerns Over Government Shutdown

In the Beige Book prepared by the Chicago Fed, covering the period from August 26 to October 7 which includes the first week of the government shutdown, companies surveyed expressed concerns over the impact of a prolonged shutdown of the US government. 8 Districts reported similar growth rates in economic activity previously while growth slowed in the Philadelphia, Richmond, Chicago, and Kansas City Districts. The overall tone of the report was more dovish than previous ones although it continued to describe that that economic activity expanded at a 'modest to moderate' pace.

As stated in the report, companies surveyed generally indicated that they 'remained cautiously optimistic in their outlook for future economic activity, although many also noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate'. On employment, the growth remained 'modest' and companies in several districts were 'cautious to expand payrolls, citing uncertainty surrounding the implementation of the Affordable Care Act and fiscal policy more generally'. For instance, retail hiring Cleveland and Dallas was 'primarily limited to staffing of new stores' while hiring in Boston's manufacturing sector was mainly for 'replacement or to fill key needs'. Meanwhile, 'New York noted slower job growth, and Chicago reported that manufacturers were cutting back on overtime'. Yet, demand for skilled labor remained high in many Districts.

Manufacturing activities expanded 'modestly' with Cleveland, St. Louis, and Minneapolis experiencing faster growth while New York, Richmond, and Chicago showing weakness. The expansion was driven by strength in the automotive and aerospace industries. Concerning the impact of the government shutdown, there was 'little immediate disruption' but many companies were 'worried about the potential impact if the closing became prolonged'.

The construction and real estate sectors 'continued to improve' as home sales and prices rose in most districts with Minneapolis and Dallas Districts showing stronger pace of expansion while Richmond and Philadelphia growing 'slightly'. A number of Districts reported 'concerns from homebuilders and realtors over rising mortgage rates'. Yet, Dallas indicated that 'rising interest rates were not hurting affordability' while Boston experienced 'some boost to activity by homebuyers entering the market in anticipation of future increases in rates'. It appears, in general, that the increase in mortgage rates and recent rise in home prices should not derail the housing recovery which has been recently driven by the rise in fundamental demand.

Overall, the tone of the report is more dovish than previous ones, reflecting companies' concerns over the government shutdown, as well as the fiscal uncertainty. These worries should, however, dissipate once the lawmakers reach a deal.

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CURRENCY PAIRS — UNDERSTANDING AND READING FOREX QUOTES

Our first grade in forex literacy is for understanding how to read the price quote. In forex, currencies are always quoted in pairs. In other words, it’s only possible to value a currency in terms of another one. If you want to buy 100 Euros, how are you going to pay for it? If you were to pay in euros, you’d not be currency trading, and when you use another currency to fund your purchase of the euros, you’re actually creating a forex quote.

It’s actually quite easy to evaluate forex quotes once you get the hang of it, and the fastest way to learn is by considering some examples:

EUR/USD 1.2786

So what does the above quote tell us? What it says is that 1 Euro is able to buy 1.27 units of the US currency. Or, continuing on our previous transaction, we would have to pay

127 USD for 100 Euros we wanted to buy.

But in fact this value is only the average of the bids (price to buy) and offers (price to sell) for a currency pair at a particular time. The bid-ask spread is usually very low for the most liquid pairs, such as the EUR/USD, but at times of illiquidity in the markets, as before a statistical news release, or a central bank decision, the spread can widen to much greater levels.

The quote represents the best pricing that the world market offers for a currency pair at a particular moment. A quote on a computer does not usually include all of the offers and bids all over the world, but because of the very liquid nature of the forex market, any significant difference in quotes across different parts of the world is very quickly eliminated through computer-based, automatic arbitrage, and consequently, except at times of market turmoil the difference between regional quotes is quite low.

So let’s say return to the EUR/USD quote. Our quote is at 1.2786, and the bid-ask spread is at 0.009, as stated by the broker. What this means is that there’s a difference of 0.9 cent between what you pay to buy the same currency pair, and what you’d receive if you were selling it. There’s always a spread in even the most liquid markets, but the spread is usually widened further by the brokerage firm, so that it can make a profit from the individual traders’ deals.

The important point to keep in mind when evaluating quotes is that one quote is valid for only a fraction of a second. At times of market tension, great fluctuations can occur within the scope of one minute, rendering the quote almost useless. Despite the great focus on prices and price patterns among many traders, it’s always advisable to keep the time of the day, of the year, and the emotional atmosphere of the market in mind while deciding on what we should do about a particular quote. For example, quotes during the last few weeks of the year, or in the Thanksgiving week, or at about an hour before the opening of the US market have far less value in determining future price direction and trends than those seen during an ordinary business day at regular hours. So, to repeat, the trader must not only know the price quote at a given moment, but also the seasonal, hourly, and emotional backgrounds that influence the quote before he decides to make a trade on the information.

That skill can be gained through practice, and is perhaps easier learned through experience than reading.

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RBA Minutes Showed Softened Easing Bias

Policymakers retained their easing bias in the RBA minutes for the October meeting. Yet, the stance appeared to be weaker than previous ones. The central bank decided that it should 'again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them'. It pledged to 'continue to examine the data over the months ahead to assess whether monetary policy was appropriately configured'. The easing bias is aimed at curbing the appreciation of the Australian dollar. Yet, the Aussie surged to a 4-month high after the minutes.

On economic developments, the RBA noted that 'the information to hand at the meeting was consistent with growth of economic activity remaining below trend over the next year or so before an expected pickup'. On the property market, the minutes stated that 'the effect of low interest rates was evident across a range of indicators and had further to run. House prices and turnover had increased and leading indicators pointed to a pick-up in dwelling investment over the period ahead. While credit growth remained moderate, there were signs of an increased appetite for borrowing, most notably among investors'. Policymakers also acknowledged the 'noticeable' improvement in business confidence recently with some 'trade-exposed' firms reporting an improved outlook to the bank. According to the minutes, although the improved confidence was 'generally yet to translate into concrete plans for higher investment [and] employment', it has led to improvement confidence in the investment in tourism. Policymakers added that they were uncertain about the sustainability of the confidence.

Another development mentioned in the minutes was the appreciation of the exchange rate. It was a surprise that the RBA did not reiterate its preference for a lower exchange rate, after it had stated at the post-meeting statement that 'a lower level of the currency … would assist in rebalancing growth'. In the minutes, policymakers attributed the recent rebound in Australian dollar to the Fed’s decision not to taper and better Chinese data. Similar to the observation of the pickup of sentiment the RBA stressed that 'it was difficult to know how significant the effects of' these developments would be as 'it was uncertain whether they would be sustained'.

Although economic activities continued grow below trend, the RBA appeared to be more confidence that consumer and business confidence would continue to improve as a result of low interest rates. It is expected that the central bank would leave the cash rate unchanged at 2.5% through the year end but deterioration of the US fiscal situation and a rapid rise of housing prices might trigger the RBA to act accordingly.

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BoE Saw Little Inflation Risks, Signaling to Keep Rate Low

The BOE minutes for the November meeting affirmed that the UK economy was undergoing a sustainable recovery. Yet, policymakers were uncertain about the outlook after the end of this year. In the quarterly inflation report released last week, policymakers revised lower the inflation forecasts and forecast that the unemployment rate might fall to the 7% threshold earlier than previously anticipated. The BOE left the Bank rate unchanged at 0.5% and the asset purchase program at 375B pound. The decision was made unanimously.

On domestic economic developments, the BOE acknowledged a steady pickup in economic activities, noting that "momentum had picked up further since the time of the August Report and it was likely that GDP would grow at a little above its long-term average rate during the second half of the year". Business surveys and indicators of the housing market showed an "even faster rate of expansion, although they had also suggested a faster rate of growth in Q3 than the 0.8% the ONS had published in its preliminary estimate". It also warned that the economy "remained vulnerable to disorderly adjustment in the Euro area and in some emerging economies".

The central bank appeared satisfied with the decline in inflation last month and saw little inflation risks going forward. According to the minutes, "some indicators of inflation expectations had risen. But these moves were thought to be of little economic significance". Policymakers noted that "there were few indications that higher inflation expectations were currently a major consideration in wage demands or companies' planning assumptions, and the lower rate of inflation might itself reduce expectations". In short, policymakers forecast that "medium-term inflation expectations remained sufficiently well anchored".

On the monetary outlook, the minutes stated that "once unemployment had reached 7%, the Committee would reassess what it had learned about the nature of the recovery. In the meantime, the Committee would continue to judge the appropriate stance for policy each month in line with the guidance given in August". The central bank reiterated that 7% is not an automatic trigger of rate hike, saying, "...with the proviso that medium-term inflation expectations remain sufficiently well-anchored, the projections for growth and inflation under constant bank rate underlined that there could be a case for not raising bank rate immediately when the 7% unemployment threshold was reached".

The pound soared ahead of the minutes but pared some gains after the document turned out to be less hawkish that expected. The policy rate is expected to stay at exceptionally low level for some time after the unemployment rate fall to the more preferred levels.

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Bank Of Japan Preview - Unlikely To Respond To Slower Growth In Q3

Bank Of Japan (BoJ) in our view is unlikely to announce any additional stimulus in connection with its monetary meeting on 21 November. Specifically, BoJ’s target for expansion of the monetary base (currently the main policy instrument) is expected to be maintained at 60-70 trillion yen annually. BoJ is expected to announced its decision very early tomorrow morning CET before financial markets open in Europe.

At its last meeting just three weeks ago BoJ maintained its inflation forecast, meaning it still believes it will be able to reach its 2% inflation target at some stage in 2015. Data released last week showed that GDP growth in Q3 slowed to 1.9% q/q ann. from 3.8% q/q ann. and there has been some speculation that BoJ could soon be forced to respond with further easing. The likelihood that BoJ announces additional stimulus in connection with this week’s monetary meeting, in our view, is extremely low. First, the slowdown in GDP growth in Q3 has already been factored in the revised macroeconomic forecast BoJ published at its previous meeting. Second, September and October data has so far been strong, suggesting GDP growth will rebound above 3% q/q ann. again in Q4

At this stage, we do not see any reason why BoJ should start to question the effectiveness of its monetary policy. Growth in credit and the broad money supply measures continue to accelerate, suggesting that the aggressive expansion in the monetary base is spilling over into the real economy and the recovery appears to be on track despite the slowdown in Q3. In addition, consumer prices are out of deflationary territory, albeit the pace of the increase in inflation will probably slow substantially in the coming months. Hence, monetary policy will, in our view, be on autopilot until Q2 next year, which means that the current (very aggressive) pace of expansion of the monetary base will be maintained

Looking further ahead, GDP is poised to slow markedly in Q2 14 in the wake of the planned increase in the sales tax from 5% to 10% in April 2014. Hence, tapering is off the agenda next year in Japan. On the contrary, we believe BoJ could be forced to ease monetary policy even more aggressively at some stage in Q2 next year. For that reason we see further JPY weakness in 2014.

It is also a clear consensus view that BoJ will not announce any new easing measures this week. However, in the wake of the slower GDP growth in Q3, a slight hope that BoJ could possibly ease further soon has probably sneaked into the market. Hence, in light of the weaker JPY ahead of the BoJ meeting, JPY could strengthen a bit in the wake of the meeting.

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US Highlights of the Minutes from the October 29 and 30 FOMC Meeting

The Federal Open Market Committee (FOMC) participants viewed the information received during the period since the September 2013 FOMC meeting as indicating that economic activity expanded "at a moderate pace," but noted that "incoming data suggested growth in the second half of 2013 might prove somewhat weaker" than previously anticipated. Participants expected the direct effect of the 16-day government shutdown at the beginning of October to be "temporary and limited," but some expressed concern about the potential effect to business and consumer confidence from "repeated fiscal impasses." While a number of participants regarded the September payroll employment report as "somewhat disappointing," they noted that labour markets "continued to improve, albeit slowly." Inflation remained below the Committee's long-run objective while inflation expectations remained stable but below 2% "by some measures."

Financial conditions were noted to have "eased notably" since the previous meeting, although longer-term rates remain "well above their levels in the spring." When discussing market reactions to the Committee's decisions in June and September, participants noted that interest rate movements suggest financial markets see a close link between asset purchases and forward guidance regarding the fed funds rate. Some participants saw the decline in rates following the September meeting, which brought the path of short-term rates "more closely into alignment" with forward guidance, as implying increased credibility of monetary policy.

In the discussion of monetary policy, participants generally expected upcoming employment data would be consistent with the Committee's expectations for an "ongoing improvement in labour market conditions and would thus warrant trimming the pace of purchases in coming months." Some participants even suggested tapering the pace of asset purchases before seeing an "unambiguous improvement" in labour market conditions. It was suggested that, in this case, "alternative actions to proved accommodation" might be required to offset the effect of reduced purchases. Participants expressed reservations about the possibility of introducing a mechanical rule to tie the pace of purchases to labour market data. Some participants suggested announcing a total size of remaining purchases or a timetable for reducing the pace of purchases, but it was noted that such a strategy would be inconsistent with the Committee's data dependent stance.

When the Committee begins to taper the pace of purchases, a number of participants expressed a preference to make equal adjustments to Treasury and MBS purchases, while others indicated that trimming the pace of Treasury purchases more rapidly would "signal an intention to support mortgage markets." One participant favoured reducing MBS purchases first to "reduce the potential for distortions in credit allocation."

Turning to forward guidance, participants discussed providing additional information on the likely path of the fed funds rate once the current unemployment target was reached and once the funds rate was raised from its current, exceptionally low level. Some participants favoured lowering the unemployment threshold from the current 6.5%, while additional guidance, such as a commitment to keep rates low as long as inflation remained below a certain threshold, was also discussed. Several participants favoured providing additional qualitative guidance on the path of the fed funds rate once the employment threshold was reached, such as laying out the range of information the Committee would consider in deciding when to raise the rate. It was suggested that these modifications to forward guidance could be used to "add to policy accommodation, perhaps in conjunction with a reduction in the pace of asset purchases."

The minutes indicate that the Committee's decision to maintain the pace of asset purchases in October reflected concerns that growth in the second half of the year would be slightly slower than previously anticipated. The Committee emphasized scope for enhancement to policy communication; however, consensus on the main thresholds remained intact. This is consistent with our expectation for the fed funds rate to remain in the current, exceptionally low range of 0.00 to 0.25% into 2015. Nonetheless, the ongoing improvement in labour markets as indicated by the October nonfarm payroll report and upward revision to September employment gain will likely result in the Fed beginning to taper its asset purchases in March 2014.

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Dovish Yellen Defended Easing As Economic And Employment Growth Remain Far Short Of Potential?

Vice chairman Janet Yellen's testimony before the Senate contained few surprises. Yet, it did not prevent equities to rise, and US dollar and yields to fall, as the upcoming Fed chairman reiterated her dovish stance and defended the central bank's accommodative monetary easing measures. Yellen indicated that the best way to normalize monetary policy is to normalize the economy, noting that 'a strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases' and 'Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy'. In short, economic developments remain the key determinant of the tapering schedule on which Yellen refrained from giving any hints.

Senators criticized the negative impacts of low rates on deposits and risks to financial stability. While admitting that low interests rates hurt savers, Yellen noted that slack demand would have resulted in low yields even if the Fed had not implemented monetary policies and/or QE. Instead, the Fed's easing has supported the job and housing markets. Concerning risks on financial stability, Yellen defended that she has not see signs of systemic bubbles despite the large size of the balance sheet. Yet, she affirmed that the Fed has been monitoring the risks. In contrast with the case of Bernanke, senators did not questioned about the inflationary risks. After all, Yellen stayed consistent with the Fed's mandate to keeping the Fed's long-run inflation target at 2%. She also stated that she and her colleagues have been striving to maintain price stability.

Another mandate of the Fed is on employment. Yellen appeared to be skeptical of the representativeness of the employment figure (e.g. the unemployment rate) on the actual job market conditions. Indeed, in previous occasions, Bernanke noted that the drop in labor force participation has partly led to the apparent decline in the unemployment rate, and this likely has overstated actual improvement in labor markets. The Fed might find it difficult to rely on the reported statistics in assessing the real employment conditions. Yellen also cited similar reasons to warn that the job market is probably not as healthy as suggested by the job market data. These comments might trigger to speculations of the recent hot topic that the Fed might lower the unemployment threshold. Unfortunately, we failed to get any hint from Yellen. While her comments appeared to support a lowering of unemployment rate threshold as part of the FOMC's communication on interest rate policy, Yellen at the same time noted that there may be resistance should the Fed move the threshold to 6% or below.

As an existing core Fed member, it's expected the Yellen's comments were mainly supportive of the Fed's monetary policies. She explicit stated that she believed the benefits of asset purchases and lower rate for longer guidance exceeded the costs both in terms of financial stability and inflation risks.

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FOREX PIPS AND LOTS

A pip is the smallest amount of movement a price quote can make. In other words, each tick of the price quote is a pip. When EUR/USD moves from 1.2786 to 1.2787, for example, it has moved by one pip. You could also call it a point or a tick, but in forex traders’ jargon, pip is the word.

It’s a good idea to measure your profit or loss in pips rather than in the amount you actually lose or earn, since the trader’s performance can only be valued through his success in gathering pips. For instance, supposing trader A has a beginning capital of 100 USD, and trader B has only 10, it would take trader B ten times as much in terms of pips to achieve the same gain that was acquired by trader A in absolute dollar terms. In terms of their prowess in the market, however, if trader B were to make just 1/10 of what trader A makes, they’d still be equal, due to the the difference between their starting capital. This same logic can be utilized when assessing one’s own prowess, and if a diary is kept, it’s always better to note the loss or profit in pips, rather than cash, so as to keep a better track of performance.

It must also be remembered that one pip in the currency pair that is traded may not be the same amount in the trader’s base currency, that is, the currency with which he funds his account. For instance, if your currency is the British Pound, and you’re trading the EUR/USD, one pip movement in the currency pair would be a different amount in your base currency, depending on the quotes.

Another important term in trading forex is the lot, which is the smallest amount of currency you can trade at a particular level of leverage, and the standard lot size is 100,000 USD. Among today’s forex brokers, there are those who allow traders to enter bids without the use of lots (sometimes called mini lots), and the inexperienced trader may seek them before gaining enough confidence to start trading with a higher volume.

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MARGIN TRADING AND LEVERAGE ACCOUNTS

It’s very important that the trader gain a good grasp of these two concepts before engaging in any deals, because leverage and margin determine the lifespan of any trading account in a far more decisive manner than either technical or fundamental analysis.

Margin trading is trading with borrowed funds, and is closely related to leveraging. The broker allows the trader to control a far greater amount of money in the market in exchange for a small deposit of funds, with the understanding that the sum borrowed must be returned in exact amount, with any losses or profits returned to the account of client (the trader).

The amount that the client can control is determined by a number called the leverage ratio, and even the occasional observer can notice this number being proclaimed loudly by brokers in the advertisements that they scatter everywhere online. It’s not that difficult to grasp what the leverage ratio does: it simply multiplies the trader’s potential losses and gains in the market by the specified amount. For instance at a leverage ratio of 1/100, the client (you) will be able to control 100,000 USD which makes a standard lot, for a deposit of a mere 1,000 USD, and every single pip gain or loss will be multiplied a hundred times. To put this in a better perspective, you need a movement of just 1% in the price quote before your account is doubled — or wiped out.

One will often come across notices on broker websites making the claim that leverage is a double-edged sword; that you can both lose and gain massively depending on what you do. But high leverage, for sure, is a sword with only one edge, and we will discuss why it is so later.

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Dovish Yellen Defended Easing As Economic And Employment Growth Remain Far Short Of Potential?

Vice chairman Janet Yellen's testimony before the Senate contained few surprises. Yet, it did not prevent equities to rise, and US dollar and yields to fall, as the upcoming Fed chairman reiterated her dovish stance and defended the central bank's accommodative monetary easing measures. Yellen indicated that the best way to normalize monetary policy is to normalize the economy, noting that 'a strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases' and 'Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy'. In short, economic developments remain the key determinant of the tapering schedule on which Yellen refrained from giving any hints.

Senators criticized the negative impacts of low rates on deposits and risks to financial stability. While admitting that low interests rates hurt savers, Yellen noted that slack demand would have resulted in low yields even if the Fed had not implemented monetary policies and/or QE. Instead, the Fed's easing has supported the job and housing markets. Concerning risks on financial stability, Yellen defended that she has not see signs of systemic bubbles despite the large size of the balance sheet. Yet, she affirmed that the Fed has been monitoring the risks. In contrast with the case of Bernanke, senators did not questioned about the inflationary risks. After all, Yellen stayed consistent with the Fed's mandate to keeping the Fed's long-run inflation target at 2%. She also stated that she and her colleagues have been striving to maintain price stability.

Another mandate of the Fed is on employment. Yellen appeared to be skeptical of the representativeness of the employment figure (e.g. the unemployment rate) on the actual job market conditions. Indeed, in previous occasions, Bernanke noted that the drop in labor force participation has partly led to the apparent decline in the unemployment rate, and this likely has overstated actual improvement in labor markets. The Fed might find it difficult to rely on the reported statistics in assessing the real employment conditions. Yellen also cited similar reasons to warn that the job market is probably not as healthy as suggested by the job market data. These comments might trigger to speculations of the recent hot topic that the Fed might lower the unemployment threshold. Unfortunately, we failed to get any hint from Yellen. While her comments appeared to support a lowering of unemployment rate threshold as part of the FOMC's communication on interest rate policy, Yellen at the same time noted that there may be resistance should the Fed move the threshold to 6% or below.

As an existing core Fed member, it's expected the Yellen's comments were mainly supportive of the Fed's monetary policies. She explicit stated that she believed the benefits of asset purchases and lower rate for longer guidance exceeded the costs both in terms of financial stability and inflation risks.

Read More

BOJ Needs To Monitor Market Evolvement Although Yen Weakened, CPI Picked Up

USD/JPY strengthened further, heading towards the 100 level, after the breach above 99 last week. Improvement in US economic data should keep speculations of the Fed's QE tapering in site, facilitating depreciation in Japanese yen. The recent pickup of Japan's inflation has been partly driven by depreciation of Japanese yen as well as the BOJ's monetary easing. Yet, if yen's weakness and improvement in inflation proved to be modest going forward, the central bank would need to consider additional easing.

Picking up from the trough of -0.5% y/y in March, core CPI turned positive at +0.7% in September and has gained +1.2% so far this year. The BOJ's refusal to implement monetary easing at the October 31 meeting was widely anticipated. It also reflected the central bank's confidence that inflation would continue to recover at a steady pace. The central bank's semi-annual "Outlook Report" maintained the inflation target of +0.7% for core CPI (excluding fresh food prices) for FY 2013, +1.3% in FY14 (excluding consumption tax rate hike) and +1.9% (excluding consumption tax rate hike) in FY15.

Japan continued to see net capital outflow in terms of security investments in October. It was reported yesterday that residents' buying of foreign bonds and notes exceeded the sales, for the 4th consecutive month, by 1.035 trillion yen in October. Despite the net sales of foreign equities, net purchase of securities was at a total of 8.61 trillion yen last month. Although the global economic outlook remained uncertain, Japanese investors still have vast interests in foreign security investment as the Japanese yen has been pressured by a number of issues including strength of the greenback on tapering outlook, recovery in Australian dollar amid RBA's upbeat economic prospects and additional BOJ easing threats.

For the coming weeks, it might be more difficult to establish fresh shorts in JPY positions as more US economic data reflecting the impacts of the October government shutdown would come under the spotlight. Meanwhile, investors would stay cautious ahead of corporate earnings announcements. Yet, renewed Japanese strength, if any, should be limited given the broad-based assumption of US and global economic recovery. Concerning the BOJ's stance, we expect it to continue monitoring changes in Japanese yen and inflationary expectations through early 2014.If the yen's depreciation and inflationary expectations proved to have benefited little from the exiting monetary easing, it would likely need to adopt further easing measures so as to raise the chance to meeting its 2% inflation target.

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