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Forex Gump
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Forex Gump is my incognito name. My real name is Feras Gimp. When I was a kid, my parents would make me hunt and gather food. So every day, I would go fish at a nearby lake and gather corn from the fields. This process took me all day and left no time for me to play. Play time actually didn’t... More
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  • Can China Really Diversify Away from the USD? 0
     When QE2 hit the world, Chinese bank officials found themselves scrambling to find ways to fight the inflow of foreign investment to their country. Huh? Why would they do that? Isn't foreign investment GOOD for the economy?

    Ahh, not quite young padawan... Too much of something is always bad, and foreign investment is not excluded from that! If too much money flows into China, it could trigger uncontrollable inflation and lead to huge asset bubbles.

    Quantitative easing programs also tend to "cheapen" currencies, in this case the USD, which puts China's huge USD-denominated holdings in danger. Take note that more than 60% of China's foreign reserve is made up of USD-denominated assets!

    The People's Bank of China (PBoC), in an effort to protect China from the possibility of inflation and asset bubbles, has been consistently increasing the required reserve ratio (RRR, or the minimum amount of money that the bank must hold on to with respect to customer deposits and notes) of commercial banks.

    The RRR currently stands at 18.5%, which is its highest level in like... uhh... ever! Market junkies say that the direct approach at managing market liquidity showed China's determination control price pressures, and its cautiousness at tightening monetary policy.

    China has also been slowly diversifying its FX reserves to reduce its exposure to the USD. its holdings. In fact, in the first seven months of 2010 China added more than 25 billion USD worth of short-term yen holdings. It has also more than doubled up its Korean debt holdings in 2010, stocking up a total of 5 billion USD worth of long-term won papers by October 2010.

    But really, does China have any other choice than the dollar? Given the high dollar share of its FX reserves, China will find it very difficult, if not impossible, to truly diversify.

    For one, China keeps its currency, the yuan, pegged to the U.S. dollar. What this means is that yuan is only allowed to appreciate (or depreciate) within a very tight range (+/- 1%) against its counterpart. Because businesses aren't prone to constantly fluctuating exchange rates, it makes trade between China and the U.S. easier and more predictable.

    Imagine you're a business owner in the U.S. who imports a lot of raw materials from China. Wouldn't you rather trade in an environment where your costs are 100% set in stone than in an environment where prices are constantly changing?

    If the U.S. dollar were to suddenly drop in value, it would lead to an increase in purchasing costs, making you less profitable. You may even take your business elsewhere if costs become too high!

    China realizes this so they make sure that their prices are always competitive. The easiest and probably the most affordable way to keep the dollar high with respect to the yuan is to buy dollars from the open market.

    Also remember that the U.S. Treasury market is the biggest government bond market. It provides relatively higher liquidity and security, which means transactions costs are very low. This makes it very appealing to investors.

    Besides, do you really think China would rather invest in euro zone assets given Europe's sovereign crisis? I don't think so. The gold market can be a good alternative for its foreign exchange reserves, but it isn't as big as the T-bill hood which makes it more volatile and risky.

    So for y'all naysayers out there, worrying that China is going AWOL on the dollar as its major reserve currency, you may want to take it easy. There's no denying the dollar's safe-haven status and it looks like the Chinese will be sticking with it for quite some time.

    Nov 29 8:31 AM | Link | Comment!
  • Coming Soon: 6 Reports That Could Rock the Comdolls' Socks

    Y'all ready to jump back into the markets after buying that new iPad or 3D TV? Here are six reports you should pay attention to if you plan to trade the comdolls this week.

    Australian GDP and Retail Sales I just have a feeling that a bunch of Pip Surfer's buddies will be paying attention to these two reports.

    Remember, the hotshot bankers at the RBA surprised the markets with a rate hike during their last meeting. Clearly, they are pretty confident about the state of the economy and want to avoid a run of inflation. This signals to me that they believe that the Australian economy will keep chugging along and churning out positive economic results.

    Speaking of spitting out positive figures, remember that last GDP report? It was expected to show growth of 0.9% during the 2nd quarter, but actually printed at 1.2%! How awesome was that?

    As for retail sales, while it's missed its targets the past few months, it has consistently been showing growth over the past 7 months. So don't be surprised if we see another positive month of growth from this report.

    If these reports were to come in and post strong figures, it would help provide support for the Aussie, which has taken some hits the past week due to the recent run of risk aversion.

    Canadian GDP and Employment Reports

    Another economy set to release a GDP reading next week is Canada. As I mentioned earlier, traders usually watch out for the GDP report because it's practically the economic report card of a country for a specific period of time.

    Canada's version of this economic report doesn't usually have the same impact as that of other major economies since it is released on a monthly basis. The September GDP reading is expected to print a measly 0.1% expansion, but we could be in for a Loonie rally if the GDP comes in way stronger. Who knows? That could be the catalyst for USD/CAD to finally break below parity!

    However, if their monthly GDP dips back into red zone again like its -0.1% reading in July, things might not look too bright for the Loonie. After all, the soon-to-be-released GDP reading for September would also allow traders to figure out how the Canadian economy did for the entire third quarter. Watch out for that on Tuesday, 1:30 pm GMT.

    Before the week comes to a close, Canada will release its employment reports, namely the employment change figure and the unemployment rate for November. These reports have huge potential to move the Loonie because jobs growth is a crucial factor in maintaining economic stability.

    Canada hasn't been doing so well on the jobs front lately because their employment change figures for the past couple of months came in below expectations. In fact, Canada even reported a decline in hiring for September. The good news is that their unemployment rate improved from 8.1% to 8.0% during that month, but that was because of a decline in the labor force.

    Although October's rebound in hiring made up for the jobs downturn in September, another weak figure for November could be bearish for the Loonie. But if the actual jobs figure meets the consensus of a 15,000 jump in hiring, USD/CAD could be in for a wild drop! Keep an eye out for the actual figures due Friday 11:00 am GMT.

    New Zealand's Business Confidence Report

    The highlight of the week from New Zealand is its monthly NBNZ business confidence report. Results for October broke a 5-month slide when it printed the first uptick with a reading of 23.7.

    Could this be a sign that the business sector is finally picking up steam? Remember, the most recent retail sales report posted results waaay above expectations. Now, whether this caused businesses to feel better about their current situations is yet to be seen.

    Since the study surveys businesses across various industries, it gives a pretty well-rounded view of the entire private sector. Investors like to keep tabs on this because an increase in business confidence may positively affect other aspects of the economy, too. It may translate into increased employment and business investment, and in the process, give the Kiwi a boost as well.

    If you're a fan of trading New Zealand news, you don't want to miss this release when it hits stands at 2:00 am GMT on Monday.

    Chinese Manufacturing PMI

    Even though China isn't home to any of the comdolls, its releases tend to have a big impact on the Kiwi and the Aussie. Of course, this effect stems from its strong trading ties with New Zealand and Australia. That being said, you may want to check out China's manufacturing PMI report due on Wednesday at 1:00 am GMT.

    Analysts say the index is likely to show a slight downgrade from 54.8 to 54.7 for November. If China's manufacturing activity were to decline, it would probably import less from New Zealand and Australia. As such, a worse-than-expected figure could result in weaker exports and currencies for both New Zealand and Australia.

    Of course there are other big reports, such as the ECB rate decision and the infamous NFP report, to watch out for this week. I'll keep you posted with some previews and updates, so better keep tabs on my upcoming articles too!

    Nov 27 9:06 AM | Link | Comment!
  • European Debt Crisis: Are Portugal and Spain Next?

    Six months after the EU and IMF's 110 billion EUR rescue package sailed out to save Greece, Ireland agreed to a bailout in order to keep its financial system afloat. With this debt contagion unfolding, how long will it be until Portugal and Spain call out for help?

    Before we get ahead of ourselves, let me first explain what contagion is.

    Simply put, contagion is when the loss of market confidence in one economy spreads to others. One way to see this is through credit yields. In recent weeks, we saw credit spreads between Ireland and Germany (considered the strongest economy in the euro zone, and therefore, the "safest") rise.

    And now, it appears that those concerns are spilling over onto Spain and Portugal. The public is now eyeing the two as the next possible recipients of bailouts because they have been dealing with financial headaches--nay, migraines!-- themselves.

    True, Portugal doesn't have a budget deficit as large as Greece's, and its banking sector isn't doing quite as badly as Ireland's. But it does still have the combined problems of high government debt, slow growth, and budget deficits hanging over its head.

    As for Spain, investors are concerned that it may default on its debts. Since people are feeling antsy about holding onto Spanish debt, the prices of Spanish bonds have risen, causing yield spreads with German bunds to reach levels unseen since the euro was created back in 1999.

    Another problem that Spain has to deal with is that it has large holdings in Portuguese banks. It can't be completely isolated from Portugal because of its exposure to the Portuguese banking sector. Whether they like it or not, the two are practically joined at the hip! Ay caramba!

    Spain's situation is particularly alarming because of the size of its economy. How big are we talking? Well, its GDP is greater than the GDP of Greece, Ireland, and Portugal combined! Thus, bailing out Spain would require drawing out a huge sum of money from the European Financial Stability Facility (OTCPK:ESFS).

    Of course, this crisis has weighed heavily on the euro. So far this week, EUR/USD has tumbled a good 400 pips. In fact, after hitting a high at 1.4279 earlier this month, the pair has fallen nearly 1000 pips!

    Hmmm... this sounds eerily familiar. Late last year, EUR/USD topped out just above 1.5000. Then, when concerns over Greek debt emerged, the pair dropped off sharply. As European leaders debated on what to do, the euro tumbled 20% in value over six months before Greece finally got bailed out.

    Could we see history repeat itself?

    Yes, I know that the EU and IMF have put aside 750 billion EUR for the sole purpose of potential bailouts. However, I don't really think they expected any other nations to actually request for a bailout. They had put up the fund to help ease tensions in the market before things spiraled out of control. They certainly didn't expect euro zone members to form a line at the bailout counter.

    And we're not exactly talking about a small figure here. As I mentioned earlier, Spain's problems are much larger than that of Greece, Ireland, or Portugal. Until we hear more news about whether or not Spain will formally ask for help, I think this European debt crisis could remain the major theme for the rest of the year.

    Nov 26 5:52 PM | Link | Comment!
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