Forex Trading Tips: Dollar King of No Yield

By Boris Schlossberg • January 31st, 2009
Boris Schlossberg

FX Market Outlook

What happens in a world without yield?

As 2009 begins to unfold the biggest story in the FX market is the inexorable movement of all G-7 interest rates to zero percent. ZIRP, as a monetary policy is no longer the sole province of BOJ. US rates are now 0.25%. UK rates are 1.5% and moving towards 1% by next week. Canadian rates are 1.5% and will no doubt drop to 1% by the next meeting of BOC. And just last week ECB President Trichet telegraphed to the market that he intends to take rates European rates below the vaunted 2% line at the meeting in March.

Even high yielders like the kiwi dropped rates by much larger than expected 150bp last week taking the RBNZ yield to a paltry 3.5%. This week the RBA is expected to follow suit taking rates to 3.25% for the Aussie. Everywhere you look in the currency market yield is disappearing faster than an ice cube at the Australian Open where temperatures yesterday hit 109F (43C).

As all industrialized economies continue to battle the growing global economic crisis by further easing their monetary policies what becomes the dominant value to drives trade? Survival. In world where consumer demand has fallen off a cliff, investors aren’t seeking a return ON capital, but simply just a return OF capital. Sovereign debt risk becomes the primary concern of currency valuation.

Ironically enough, US with its massive twin deficits and its FIRE (Finance, Insurance, Real Estate) based economy burned to the ground has become the repository of safe haven investment flows. The strength in the dollar is not a reflection of optimism in the US economy, but rather a vote of total no-confidence in Euro-zone system. With European union beginning to fragment under the pressure of escalating economic problems. traders are flocking to dollars as the only alternative left.

If the market truly loses faith in the euro experiment the pair could slice through the 1.2500 handle and even approach 1.2000 as panic liquidation will begin to set it. We haven’t reached that point yet, but next week could prove to be pivotal in determining just how fragile the support for the single European currency has become.

————--Top 5 Stories in FX This Week—————-



Why Dealing with Huge Debt is Hard

Rewriting the Rulebook for 21st-century Capitalism

Weak Dollars, Weak Presidents

How About a North American Currency?

A Nation of Children, Drowning in Debt

—————--Win or Die—————

One of the unusual characteristics of trading is that it is one of the few professions that generates a “negative paycheck”. For most of us who work on a salary. the paycheck remains the same irrespective of whether we had good day or bad day. We can work a 15 hour day or simply goof off on a slow quiet Friday afternoon and the pay will most likely not vary.

Even salespeople who earn most of their income through commissions enjoy a base salary and a draw that creates a some sort of minimum positive cashflow on a monthly basis. Trading however is unique. Not only does it not offer any guarantee of income, but it is actually one of the few enterprises that will take away every time yo make a mistake.

This diabolical dynamic destroys most traders who attempt the game because while many are prepared for the idea of no paycheck, few are ready to face the prospect of a “negative paycheck”. Yet to succeed in trading you must only overcome this fear but actually welcome the brutal nature of the business.

One way to sharpen your focus is to start from scratch each day. As traders we can become very complacent after a few winning trades and frequently will give back most of our profits once we’ve had a good run. To combat that flaw I’ have taken to sweeping out all of my daily profits into a separate account. Trust me, nothing controls your ego quicker than looking at zero profits each day. While this solution is no panacea, it does force the trader to be much more selective in his approach. Impulsive trades still occur but they are fewer and far between because you do not have the luxury of burning the “house’s money”.

Trading above all is the art of selection. As traders we always walk the fine line between being too cautious and losing out on potential profit and being too aggressive by assuming unnecessary risk. Keeping your account at zero profit each day helps to create just enough tension to put you in the right decision making mindset.

Now on to this week’s video

 

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Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.

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