Overnight Limit

The number of currency positions a trader can carry over from one trading day until the next. The central bank that regulates the bank or financial institution where the positions are held sets the overnight limit. These limits are reviewed on an ongoing basis.

Investopedia explains ‘Overnight Limit’

Overnight limits are preventative measures enacted by central banks to keep financial institutions from accumulating more currency exposure than can be hedged by the close of the trading day. This also has the effect of making financial institutions keep a closer eye on exposure to exchange rate movements throughout the day. Central banks can also set intraday limits to mitigate risk in the foreign exchange market.

Carry Trade Criteria and Risk

Carry Trade Criteria

It’s pretty simple to find a suitable pair to do a carry trade. Look for two things:

1. Find a high interest differential.
2. Find a pair that has been stable or in an uptrend in favor of the higher-yielding currency. This gives you the ability to stay in the trade AS LONG AS POSSIBLE and profit off the interest rate differential.

Pretty simple, huh? Let’s take a real life example of the carry trade in action:

This is a weekly chart of AUD/JPY. Up until recently, the Bank of Japan has maintained a “Zero Interest Rate Policy” (as of September 2010, the interest rate stands at 0.10%).

With the Reserve Bank of Australia touting one of the higher interest rates among the major currencies (currently at 4.50% as of this writing), many traders have flocked to this pair (one of the factors creating a nice little uptrend in the pair).

From the start of 2009 to early 2010, this pair moved from a price of 55.50 to 88.00 – that’s 3,250 pips!

If you couple that with interest payments from the interest rate differential of the two currencies, this pair has been a nice long term play for many investors and traders able to weather the volatile up and down movements of the currency market.

Of course, economic and political factors are changing the world daily. Interest rates and interest rate differentials between currencies may change as well, bringing popular carry trades (such as the yen carry trade) out of favor with investors.

Carry Trade Risk

Because you are a very smart trader, you already know what the first question you should ask before entering a trade is right?

“What is my risk?”

Correct! Before entering a trade you must ALWAYS assess your max risk and whether or not it is acceptable according to your risk management rules.

In the example at the start of the lesson with Joe the Newbie Forex Trader, his maximum risk would have been $9000. His position would be automatically closed out once his losses hit $9000.

Eh?

That doesn’t sound very good, does it?

Remember, this is the worst possible scenario and Joe is a newbie, so he hasn’t fully appreciated the value of stop losses.

When doing a carry trade, you can still limit your losses like a regular directional trade.

For instance, if Joe decided that he wanted to limit his risk to $1000, he could set a stop order to close his position at whatever the price level would be for that $1000 loss. He would still keep any interest payments he received while holding onto the position.

JPY

‘The volume of exports is still unimpressive as the economic growth of China is stagnating and Europe’s expansion remains weak.’ – Long Hanhua Wang, Economist at Royal Bank of Scotland Group Plc

Japan’s merchandise trade deficit widened by as much as 10% in May to 993.9 billion yen, marking the 11th consecutive month of deficit as energy import costs continue to be high following shutdown of nuclear plants. According to the Ministry of Finance, exports increased 10.1% from the previous year to 5.77 trillion yen, the most since 2010, amid weak national currency, which has already lost more than 20% versus major counterparts – the U.S. Dollar and Euro, providing a boost to exporters and Shinzo Abe’s plan to revive Japan’s economy. Nevertheless, falling Yen’s value has pushed up costs for natural gas, crude oil, and other commodities for the resource scarce country.

The data indicates a robust growth in outbound shipments to key markets with exports to the U.S. increasing 16.3%, while to China—8.3%. Japan’s efforts to improve trade relations with the rest of Asia proved to be yielding results, with exports surging as much as 11% to 3.2 trillion yen. However, overseas sales to the EU declined 5%. Meanwhile, imports also surged 10% in May from a year earlier to 6.76 trillion yen, the ministry said, missing expectations for 11% after gaining a revised 9.5% a month earlier.

EUR

‘Despite mostly positive economic data for the German economy, the ZEW Indicator remains at the level of the previous month’ – ZEW President Prof. Dr. Clemens Fuest

Investors’ mood in Europe’s largest economy rose significantly this month, as the economy is gathering pace. According to data from the ZEW Center for European Economic Research, a gauge of investor and analyst expectation, which was designed to predict economic development during the next six months, surged to 38.5 up from 36.4 a month earlier. Economists however, expected a more moderate reading of 38. The ZEW survey of current economic situation within the country slid to 8.6 points compared with 8.9 in May.

German industrial output gained momentum in April and rose the most in more than a year, signalling German economy has accelerated further since expanding only 0.1% in the first quarter of this year. The Bundesbank also expects that the economic output should improve markedly in the second quarter, while warning of a potential slowdown in the second half of a year. Germany is recovering from a gradual weakening in the second and third quarters of 2012, and latest projections are showing that real GDP is expected to grow by 0.4% in 2013 and 1.8% in the next year. Despite signs of improvement subdued activity in the whole region are holding back the recovery and risks for another contraction remain high.

USD

‘Some Fed officials have expressed concern about inflation, but I think the Fed is cognizant of the fact that we’re probably at the low readings on inflation’ -Omair Sharif, an economist at RBS Securities Inc. in Stamford

Housing starts in the world’s largest economy rose less than expected last month, reflecting labour and material constraints, however the overall trend remains consistent and the housing market is expected to gain momentum. The Commerce Department said that housing starts jumped 6.8% in May, to a 914,000 annualized rate after a revised 856,000 in the preceding month, and below analysts’ expectations, who projected a reading of 950,000. Data also showed that application to build one-family house rose 1.3% to 622,000, the fastest pace since May 2008. The fact that building permits are exceeding the number of starts are suggesting the construction will keep rising, supported by improved labour market and historically low mortgage rates.

In a separate report the Labor Department said that the U.S. consumer prices were restrained by the first drop in food prices in almost four years in May, adding to signs inflation remains under control. The nation’s consumer prices edged higher 0.1%, recovering from a 0.4% drop in April, but missing forecasts of a 0.2% gain. At the same time, core inflation, which excludes volatile food and fuel prices, increased 0.2% in line with projections. The Federal Reserve, however, targets another report from the Commerce Department, known as the PCE index, which showed even weaker levels of core inflation.

OVERVIEW

Markets are looking forward to learn about the FRS decision on QE3. On Monday G8 was opened, where global economy issue would be discussed. Coincidentally meeting of G8 leaders is at the same period as FRS meeting, that’s why Bernanke had to stay in the US.  A lot will depend of the FRS decision, that’s why one of the reasons of Bernanke’s absence in Northern Ireland is a wish to avoid additional pressure. On Monday it was learnt that new Italian government decided to allocate 4 billion Euros to support deteriorating economy. These funds are meant for new jobs creation (around 30K). Besides, tax burden will be weakened. Former Prime Minister Mario Monti has increased the tax load, what has become one of the reasons of lengthy recession. At the first quarter Italian economy lacked 0.6%. In Rome authorities assured that they would stick to their aspiration to reduce budget deficit to the planned level of 2.9% of the GDP by the end of the year. The very possibility of the goal is based on too positive forecast of the government that by the end of 2013 economy decline will constitute 1.3%. For deficit reduction an incremental expenditures’ reduction will be needed. It can hit in return GDP dynamics, triggering deeper recession. In Greece a parliamentary crisis is exacerbating again.  In order to fulfill their obligations to creditors they apparently don’t have enough money, that’s why prime-minister Antonis Samaras of the country made decided to close national broadcasting company ERT. His coalition partners refused to support that decision, but Samaras on weekend confirmed again that he wasn’t going to give up, and afterward the conflict rose to another level. If compromise is not found and coalition collapses, there will be new elections. They might question economic reforms realization and almost for sure will force creditors to freeze financing. It goes without saying that new elections will demand expenditures, while country doesn’t have any money. Precisely the price of new elections can push polititians to some decision, but there is a strong temptation to take advantage of people’s irritation. According to recent survey around 65% of Greeks object closing of national channel.

TECHNICAL ANALYSIS

EURUSD

The Euro remains strong. At the moment it targets 1.3425. Before the FOMC decision on QE markets are relatively quiet. That is why analysts suppose that the Euro will stick to its current bullish trend. Then a lot will depend on the decision itself. If QE cut is postponed, then the currency can advance even higher.

USDJPY

The pair is consolidating after an abrupt dip during last month. Still it remains under pressure and further depreciation towards 92.30 on the downside looks plausible at the moment.

GBPUSD

The Pound continues its upward movement from 1.5008. Support is now at 1.5600. Next target on the upside is 1.5800 area. A breakdown below 1.5600 support will signal an approach of consolidation and potential further dip.

Online Currency Exchange

An online system for exchanging one country’s currency for another. There is no central exchange in the forex market because it is a network of computers that connect banks, brokers and traders together. Online currency exchanges are essentially forex brokers that allow for delivery of the currencies traded.

Investopedia explains ‘Online Currency Exchange ‘

Online forex currency exchanges will often provide the service of an online currency converter along with the option to actually convert the currencies for a nominal fee. This fee is similar to the spread quoted in pips.

A couple of advantages of exchanging currencies online include being able to do it from the comfort of your home or office, and/or being able to lock in a preferred exchange rate at the time you see it, rather than having to run to the brick-and-mortar currency exchange and risk missing the rate because of market movements.

Carry Trade Criteria and Risk

Carry Trade Criteria

It’s pretty simple to find a suitable pair to do a carry trade. Look for two things:

1. Find a high interest differential.
2. Find a pair that has been stable or in an uptrend in favor of the higher-yielding currency. This gives you the ability to stay in the trade AS LONG AS POSSIBLE and profit off the interest rate differential.

Pretty simple, huh? Let’s take a real life example of the carry trade in action:

This is a weekly chart of AUD/JPY. Up until recently, the Bank of Japan has maintained a “Zero Interest Rate Policy” (as of September 2010, the interest rate stands at 0.10%).

With the Reserve Bank of Australia touting one of the higher interest rates among the major currencies (currently at 4.50% as of this writing), many traders have flocked to this pair (one of the factors creating a nice little uptrend in the pair).

From the start of 2009 to early 2010, this pair moved from a price of 55.50 to 88.00 – that’s 3,250 pips!

If you couple that with interest payments from the interest rate differential of the two currencies, this pair has been a nice long term play for many investors and traders able to weather the volatile up and down movements of the currency market.

Of course, economic and political factors are changing the world daily. Interest rates and interest rate differentials between currencies may change as well, bringing popular carry trades (such as the yen carry trade) out of favor with investors.

Carry Trade Risk

Because you are a very smart trader, you already know what the first question you should ask before entering a trade is right?

“What is my risk?”

Correct! Before entering a trade you must ALWAYS assess your max risk and whether or not it is acceptable according to your risk management rules.

In the example at the start of the lesson with Joe the Newbie Forex Trader, his maximum risk would have been $9000. His position would be automatically closed out once his losses hit $9000.

Eh?

That doesn’t sound very good, does it?

Remember, this is the worst possible scenario and Joe is a newbie, so he hasn’t fully appreciated the value of stop losses.

When doing a carry trade, you can still limit your losses like a regular directional trade.

For instance, if Joe decided that he wanted to limit his risk to $1000, he could set a stop order to close his position at whatever the price level would be for that $1000 loss. He would still keep any interest payments he received while holding onto the position.

JPY

‘You can only buy so much time with monetary policies’ – Yuici Kodama, Chief Economist at Meiji Yasuda Life Insurance Co.

On a seasonally adjusted monthly basis Japan’s tertiary industry activity index unexpectedly remained flat in April compared to a revised 0.2% drop a month earlier, according to the Ministry of Economy, Trade and Industry. The index stood at 99.7, missing expectations for a 0.2% gain following a 0.9% decline in March. Industries, which experienced a boost in activity included finance, scientific research, health care, communications and utilities, while such industries like retail trade, transportation, amusement services, real estate, accommodations and learning support saw a decline in activity.

Meanwhile, leading economist remained divided over whether Prime Minister Shinzo Abe’s plan would bring desired results, but all agreed that there is a need for deregulation and new growth strategies. It is believed that Abe should take bold steps on structural reforms including introduction of corporate tax cuts and major deregulation in the medical, educational, agricultural and other industries.

EUR

‘You cannot say that exports are a real growth driver at the moment. To see a more sustainable recovery of the euro zone, we’ll have to wait for the second half of this year’ – Carsten Brzeski, Senior Economist at ING

The Euro bloc’s trade surplus unexpectedly narrowed in April amid decline in exports for the first time in four months, according to the latest data from the European statistics bureau Eurostat. The seasonally adjusted trade surplus reached 14.9 billion euros (19.9 billion U.S. dollars) compared to 22.9 billion euros in March, marking a 30% decline on a monthly basis. In contrast, economists expected a 21.2 billion euros trade surplus. The lower surplus was attributable to a 0.8% monthly drop in exports and a 0.5% increase in inbound shipment. However, the Eurozone exports remain in a positive area in nominal terms since they added 9.0% to 14.9 billion euros trade surplus compared to 3.3 billion euros in the previous year.

For the European Union the trade surplus was 9.2 billion euros, down from 15.9 billion euros in March. Germany saw the largest surplus of 49.3 billion euros in the Q1, followed by the Netherlands’ 15.1 billion euros and Ireland’s 8.9 billion euros. Meanwhile, the U.K. experienced the largest deficit of 24.1 billion euros, followed by France of 20.1 billion euros, Greece of 5.3 billion euros and Spain of 4.7 billion euros.

Earlier this month the ECB lowered its growth forecast for the bloc’s economy to a 0.6% contraction from the previous estimate of a 0.5% negative growth in March.