The Forex mastery academy @Zw
Chapter One
US Dollar Index (USDX)
The U.S. Dollar Index consists of a geometric weighted average of a basket of foreign currencies against the dollar.
The U.S. Dollar Index consists of SIX foreign currencies. They are the:
Euro (EUR)
Japanese Yen (JPY)
British Pound (GBP)
Canadian dollar (CAD)
Swedish Krona (SEK)
Swiss Franc (CHF)
The U.S. Dollar Index is the exclusive property of ICE, also known as Intercontinental Exchange Group.
ICE U.S. Dollar Index
Intercontinental Exchange Group (ICE) is a global exchange, clearing, financial data, and technology company, operating multiple markets and services across nine different asset classes.
ICE operates 13 regulated exchanges, including ICE futures and OTC exchanges in the US, Canada, Europe, and Singapore. It also is the parent company of the well-known New York Stock Exchange.
Today, the company is among the largest exchange groups in the world.
✅The ICE U.S. Dollar Index futures contract is the only publicly-available, regulated market for U.S. Dollar Index trading allowing virtually round-the-clock access to futures traders around the world.
This is why the ICE U.S. Dollar Index (USDX) futures contract is considered the leading benchmark for the international value of the U.S. dollar and the world’s most widely-recognized traded currency index.
✅USDX vs. DX vs. DXY
If you’ve Googled “U.S. Dollar Index”, you might’ve seen three acronyms associated with the phrase: USDX, DX, and DXY and wondered, “What the heck is the difference between them?!”
👉What is USDX?
USDX is the umbrella term for the U.S. Dollar Index. You can’t go wrong using this term if you’re talking about the original dollar index.
What is DX?
👉The ICE Exchange symbol for the futures contract is DX, followed by the month and year code.
The ICE Exchange symbol for the value of the underlying Dollar Index (sometimes called the cash or spot index) is also DX (without a month or year code), although different data providers may use different symbols.
What is DXY?
👉DXY is a popular ticker or symbol used by Bloomberg Terminal users so that index is sometimes referred to as the “Dixie.”
DXY is more commonly used when referring to the dollar cash or spot rate, while DX is geared more for futures traders. Although as mentioned, DX can also refer to the spot rate as well.
US Dollar Index (USDX) Components
Now that we know what the basket of currencies is composed of, let’s get back to that “geometric weighted average” part.
Because not every country is the same size, it’s only fair that each is given appropriate weights when calculating the U.S. dollar index.
With its 19 countries, euros make up a big chunk of the U.S. Dollar Index.
The next highest is the Japanese yen, which would make sense since Japan has one of the biggest economies in the world.
The other four make up less than 30 percent of the USDX.
Example:
When the euro falls, which way does the U.S. Dollar Index move?
The euro makes up such a huge portion of the U.S. Dollar Index, we might as well call this index the “Anti-Euro Index“.
👉How is the U.S. Dollar Index calculated?
The ICE U.S. Dollar Index is calculated in real-time approximately every 15 seconds. This real-time calculation is redistributed to all data vendors.
The prices of the DX futures contracts are set by the market, and reflect interest rate differentials between the respective currencies and the U.S. dollar.
Now that we know what the basket of currencies is composed of, let’s get back to that “geometric weighted average” part.
Because not every country is the same size, it’s only fair that each is given appropriate weights when calculating the U.S. dollar index.
With its 19 countries, euros make up a big chunk of the U.S. Dollar Index.
The next highest is the Japanese yen, which would make sense since Japan has one of the biggest economies in the world.
The other four make up less than 30 percent of the USDX.
Example:
When the euro falls, which way does the U.S. Dollar Index move?
The euro makes up such a huge portion of the U.S. Dollar Index, we might as well call this index the “Anti-Euro Index“.
👉How is the U.S. Dollar Index calculated?
The ICE U.S. Dollar Index is calculated in real-time approximately every 15 seconds. This real-time calculation is redistributed to all data vendors.
The prices of the DX futures contracts are set by the market, and reflect interest rate differentials between the respective currencies and the U.S. dollar.
Real-time prices for the ICE U.S. Dollar Index
The real-time prices for the underlying cash U.S. Dollar Index and for futures contracts based on the U.S. Dollar Index are available from market data vendors and on WebICE (an Internet-based subscription service that provides real-time access to trading activity on the ICE trading platform).
Basically, since ICE controls the price data, and they charge a fee for the data feed, access to a real-time fee does not come FREE!
Delayed prices for the cash U.S. Dollar Index can be found on websites such as Bloomberg, MarketWatch, CNBC, WSJ, and Yahoo! Finance.
Reading the US Dollar Index
Just like any currency pair, the US Dollar Index (USDX) even has its own chart.
How is the US Dollar Index Calculated
This is strictly for the grown and geeky. Here is the formula for calculating USDX:
USDX = 50.14348112 × EUR/USD^(-0.576) × USD/JPY^(0.136) × GBP/USD^(-0.119) × USD/CAD^(0.091) × USD/SEK^(0.042) × USD/CHF^(0.036)
Just like any currency pair, the US Dollar Index (USDX) even has its own chart.
How is the US Dollar Index Calculated
This is strictly for the grown and geeky. Here is the formula for calculating USDX:
USDX = 50.14348112 × EUR/USD^(-0.576) × USD/JPY^(0.136) × GBP/USD^(-0.119) × USD/CAD^(0.091) × USD/SEK^(0.042) × USD/CHF^(0.036)
Use the USDX for Forex Trading
In the wide world of forex, the USDX can be used as an indicator of the U.S. dollar’s strength.
Because the USDX is comprised of more than 50% by the euro zone, EUR/USD is quite inversely related. Check it:
USDX Daily Chart.
Next, take a look at a chart of EUR/USD.
EUR/USD Daily Chart
It’s like a mirror image! If one goes up, the other most likely goes down.
Will you look at that? It seems like the trend lines almost inversely match up perfectly. This could be a big help to those big on trading EUR/USD.
Some of our forex trading friends in the forums monitor the USDX as an indicator for EUR/USD. Hang out with them if you wanna learn more about using this index.
If the USDX makes significant movements, you can almost surely expect currency traders to react to the movement accordingly.
Both the USDX and forex traders react to each other. Breakouts in spot USD pairs will almost certainly move the USDX in a similar breakout fashion.
To sum it all up, forex traders use the USDX as a key indicator for the direction of the USD.
✅Here are two little tips you should always remember:
If USD is the base currency (USD/XXX), then the USDX and the currency pair should move the same direction.
If USD is the quote currency (XXX/USD), then the USDX and the currency pair should move in opposite directions.
Bloomberg Dollar Spot Index
EUR/USD Daily Chart
It’s like a mirror image! If one goes up, the other most likely goes down.
Will you look at that? It seems like the trend lines almost inversely match up perfectly. This could be a big help to those big on trading EUR/USD.
Some of our forex trading friends in the forums monitor the USDX as an indicator for EUR/USD. Hang out with them if you wanna learn more about using this index.
If the USDX makes significant movements, you can almost surely expect currency traders to react to the movement accordingly.
Both the USDX and forex traders react to each other. Breakouts in spot USD pairs will almost certainly move the USDX in a similar breakout fashion.
To sum it all up, forex traders use the USDX as a key indicator for the direction of the USD.
✅Here are two little tips you should always remember:
If USD is the base currency (USD/XXX), then the USDX and the currency pair should move the same direction.
If USD is the quote currency (XXX/USD), then the USDX and the currency pair should move in opposite directions.
Bloomberg Dollar Spot Index
The Bloomberg Dollar Spot Index (BBDXY) tracks the performance of a basket of 10 global currencies against the U.S. dollar.
Its composition is updated annually and represents a diverse set of currencies that are important from a global trade and liquidity perspective.
Since other dollar indices (ahem…DXY) do not update their composition and are comprised of only a handful of currencies with concentrated weights, Bloomberg claims their index provides a better measure of the U.S. dollar.
☝️BBDXY is more dynamic.
Unlike the DXY’s static composition, BBDXY is dynamic, with an annual rebalancing process that captures the changing state of currency markets.
This results in the index that includes important currencies (like the Australian dollar) that rank higher in liquidity and trading versus the Swedish krona.
The Dollar Smile Theory
There are two “types” of U.S. dollars.
There is a “domestic” U.S. dollar which behaves like any other currency. It’s linked to the economy’s relative outlook and potential investment returns.
There is also an “international” U.S. dollar that is used as the primary currency used in global trade (for payments) and also needed to buy U.S. government bonds which are coveted for their safety.
This “international” U.S. dollar strengthens for a variety of reasons when markets are volatile and global growth slows.
When there is some sort of “shock” that happens, whether from the U.S. or abroad, and it’s big enough to cause investors and traders to panic and send financial markets lower, then it will likely cause the broad U.S. dollar to appreciate
👉USD Strengthens Due to Risk Aversion
The first part of the smile shows the U.S. dollar benefiting from risk aversion, which causes investors to flee to “safe haven” currencies like the U.S. dollar and the Japanese yen.
Since investors think that the global economic situation is shaky, they are hesitant to pursue risky assets and would rather buy up “safer” assets like U.S. government debt (“U.S. Treasuries”) regardless of the condition of the U.S. economy.
In order to buy U.S. Treasuries though, you need USD, so this increased demand for USD (to buy U.S. Treasuries) causes the U.S. dollar to strengthen.
👉USD Weakens to New Low Due to Weak Economy
Dollar drops to a new low.
The bottom part of the smile reflects the lackluster performance of the Greenback as the U.S. economy grapples with weak economic fundamentals.
The possibility of interest rate cuts also weighs the U.S. dollar down. (Although if other countries are also expected to cut interest rates, then this might be less of a factor since it’s all about expectations of the future direction of interest rest differentials.)
This leads to the market shying away from the dollar. The motto for USD becomes “Sell! Sell! Sell!”
Another factor is the relative economic performance between the U.S. and other countries. The U.S. economy may not necessarily be horrible, but if its economic growth is weaker than other countries, then investors will prefer to sell their U.S. dollars and buy the currency of the country with the stronger economy.
👉USD Strengthens Due to Economic Growth
Dollar bull market The dollar appreciates due to economic growth.
Lastly, a smile begins to form as the U.S. economy sees the light at the end of the tunnel.
As optimism picks up and signs of economic recovery appear, sentiment towards the dollar begins to pick up.
In other words, the Greenback begins to appreciate as the U.S. economy enjoys stronger GDP growth, and expectations of interest rate hikes increase (relative to other countries).
There are two “types” of U.S. dollars.
There is a “domestic” U.S. dollar which behaves like any other currency. It’s linked to the economy’s relative outlook and potential investment returns.
There is also an “international” U.S. dollar that is used as the primary currency used in global trade (for payments) and also needed to buy U.S. government bonds which are coveted for their safety.
This “international” U.S. dollar strengthens for a variety of reasons when markets are volatile and global growth slows.
When there is some sort of “shock” that happens, whether from the U.S. or abroad, and it’s big enough to cause investors and traders to panic and send financial markets lower, then it will likely cause the broad U.S. dollar to appreciate
👉USD Strengthens Due to Risk Aversion
The first part of the smile shows the U.S. dollar benefiting from risk aversion, which causes investors to flee to “safe haven” currencies like the U.S. dollar and the Japanese yen.
Since investors think that the global economic situation is shaky, they are hesitant to pursue risky assets and would rather buy up “safer” assets like U.S. government debt (“U.S. Treasuries”) regardless of the condition of the U.S. economy.
In order to buy U.S. Treasuries though, you need USD, so this increased demand for USD (to buy U.S. Treasuries) causes the U.S. dollar to strengthen.
👉USD Weakens to New Low Due to Weak Economy
Dollar drops to a new low.
The bottom part of the smile reflects the lackluster performance of the Greenback as the U.S. economy grapples with weak economic fundamentals.
The possibility of interest rate cuts also weighs the U.S. dollar down. (Although if other countries are also expected to cut interest rates, then this might be less of a factor since it’s all about expectations of the future direction of interest rest differentials.)
This leads to the market shying away from the dollar. The motto for USD becomes “Sell! Sell! Sell!”
Another factor is the relative economic performance between the U.S. and other countries. The U.S. economy may not necessarily be horrible, but if its economic growth is weaker than other countries, then investors will prefer to sell their U.S. dollars and buy the currency of the country with the stronger economy.
👉USD Strengthens Due to Economic Growth
Dollar bull market The dollar appreciates due to economic growth.
Lastly, a smile begins to form as the U.S. economy sees the light at the end of the tunnel.
As optimism picks up and signs of economic recovery appear, sentiment towards the dollar begins to pick up.
In other words, the Greenback begins to appreciate as the U.S. economy enjoys stronger GDP growth, and expectations of interest rate hikes increase (relative to other countries).
Dollar Smile Theory in reality
☝️The key is relative economic growth. If growth from other countries is growing, but the U.S. economy is growing even faster, then the U.S. dollar will swing upward to the right
In any case, this is an important theory to keep in mind. Remember, all economies are cyclical. They strengthen, then they weaken, they strengthen, then they weaken, and repeat.
The key part is determining which part of the cycle the U.S. economy and then compare how it’s doing against the rest of the world (RoW).
Intermarket Correlations
let’s first note that the U.S. dollar and gold don’t quite mesh very well.
Usually, when the dollar moves up, the gold falls and vice-versa.
The traditional logic here is that during times of economic unrest, investors tend to dump the greenback in favor of gold.
Unlike other assets, gold maintains its intrinsic value or rather, its natural shine.
let’s first note that the U.S. dollar and gold don’t quite mesh very well.
Usually, when the dollar moves up, the gold falls and vice-versa.
The traditional logic here is that during times of economic unrest, investors tend to dump the greenback in favor of gold.
Unlike other assets, gold maintains its intrinsic value or rather, its natural shine.
Gold and AUD/USD
Nowadays, the inverse relationship between the Greenback and gold still remains although the dynamics behind it have somewhat changed.
Because of the dollar’s safe haven appeal, whenever there is economic trouble in the U.S. or across the globe, investors more often than not run back to the Greenback.
The reverse happens when there are signs of growth.
Take a look at this awesome chart:☝️
☝️Currently, Australia is the third biggest gold-digger… we mean, gold producer in the world, sailing out about $5 billion worth of the yellow treasure every year!
Gold has a positive correlation with AUD/USD.
When gold goes up, AUD/USD goes up. When gold goes down, AUD/USD goes down.
Historically, AUD/USD has had a whopping 80% correlation to the price of gold!
Nowadays, the inverse relationship between the Greenback and gold still remains although the dynamics behind it have somewhat changed.
Because of the dollar’s safe haven appeal, whenever there is economic trouble in the U.S. or across the globe, investors more often than not run back to the Greenback.
The reverse happens when there are signs of growth.
Take a look at this awesome chart:☝️
☝️Currently, Australia is the third biggest gold-digger… we mean, gold producer in the world, sailing out about $5 billion worth of the yellow treasure every year!
Gold has a positive correlation with AUD/USD.
When gold goes up, AUD/USD goes up. When gold goes down, AUD/USD goes down.
Historically, AUD/USD has had a whopping 80% correlation to the price of gold!
Gold and USD/CHF
Gold's negative correlation with USD/CHF
Across the seven seas, Switzerland‘s currency, the Swiss franc, also has a strong link with gold. Using the dollar as base currency, the USD/CHF usually climbs when the price of gold slides.
Conversely, the pair dips when the price of gold goes up.
Unlike the Australian dollar, the reason why the Swiss franc moves along with gold is because more than 25% of Switzerland’s money is backed by gold reserves.
Gold has a negative correlation with USD/CHF.
When gold goes up, USD/CHF goes down. When gold goes down, USD/CHF goes up.
The relationship between gold and major currencies is just ONE of the many that we will tackle
Gold's negative correlation with USD/CHF
Across the seven seas, Switzerland‘s currency, the Swiss franc, also has a strong link with gold. Using the dollar as base currency, the USD/CHF usually climbs when the price of gold slides.
Conversely, the pair dips when the price of gold goes up.
Unlike the Australian dollar, the reason why the Swiss franc moves along with gold is because more than 25% of Switzerland’s money is backed by gold reserves.
Gold has a negative correlation with USD/CHF.
When gold goes up, USD/CHF goes down. When gold goes down, USD/CHF goes up.
The relationship between gold and major currencies is just ONE of the many that we will tackle
Oil Moves with USD/CAD
Oil is the drug that runs through the veins of the global economy as it is a major source of energy.
Canada, one of the top oil producers in the world, exports over 3 million barrels of oil and petroleum products per day to the United States.
This makes it the largest supplier of oil to the U.S.!
This means that Canada is United States’ main black gold dealer!
☝️Because of the volume involved, it creates a huge amount of demand for Canadian dollars.
Also, take note that Canada’s economy is dependent on exports, with about 85% of its exports going to its big brother down south, the U.S.
Because of this, USD/CAD can be greatly affected by how U.S. consumers react to changes in oil prices.
If U.S. demand rises, manufacturers will need to order more oil to keep up with demand. This can lead to a rise in oil prices, which might lead to a fall in USD/CAD.
If U.S. demand falls, manufacturers may decide to chill out since they don’t need to make more goods. Demand for oil might fall, which could hurt demand for the CAD.
Oil has a negative correlation with USD/CAD of about 93% between 2000 through 2016.
Oil is the drug that runs through the veins of the global economy as it is a major source of energy.
Canada, one of the top oil producers in the world, exports over 3 million barrels of oil and petroleum products per day to the United States.
This makes it the largest supplier of oil to the U.S.!
This means that Canada is United States’ main black gold dealer!
☝️Because of the volume involved, it creates a huge amount of demand for Canadian dollars.
Also, take note that Canada’s economy is dependent on exports, with about 85% of its exports going to its big brother down south, the U.S.
Because of this, USD/CAD can be greatly affected by how U.S. consumers react to changes in oil prices.
If U.S. demand rises, manufacturers will need to order more oil to keep up with demand. This can lead to a rise in oil prices, which might lead to a fall in USD/CAD.
If U.S. demand falls, manufacturers may decide to chill out since they don’t need to make more goods. Demand for oil might fall, which could hurt demand for the CAD.
Oil has a negative correlation with USD/CAD of about 93% between 2000 through 2016.
When oil goes up, USD/CAD goes down. When oil goes down, USD/CAD goes up.
And to make the correlation clearer, we can invert USD/CAD to show how both markets move pretty much at the same time (i.e., crude oil will gain value with the Canadian dollar while the U.S. dollar falls…and vice versa. Check it out in the chart below:
Check it out in the chart ☝️
☝️U.S. Dollar And Oil Relationship Is Changing
The explanation for this relationship is based on two well-known premises.
A barrel of oil is priced in U.S. dollars across the world. When the U.S. dollar is strong, you need fewer U.S. dollars to buy a barrel of oil. When the U.S. dollar is weak, the price of oil is higher in dollar terms.
The United States has historically been a net importer of oil. Rising oil prices cause the United States’ trade balance deficit to rise as more dollars are needed to be sent abroad.
And to make the correlation clearer, we can invert USD/CAD to show how both markets move pretty much at the same time (i.e., crude oil will gain value with the Canadian dollar while the U.S. dollar falls…and vice versa. Check it out in the chart below:
Check it out in the chart ☝️
☝️U.S. Dollar And Oil Relationship Is Changing
The explanation for this relationship is based on two well-known premises.
A barrel of oil is priced in U.S. dollars across the world. When the U.S. dollar is strong, you need fewer U.S. dollars to buy a barrel of oil. When the U.S. dollar is weak, the price of oil is higher in dollar terms.
The United States has historically been a net importer of oil. Rising oil prices cause the United States’ trade balance deficit to rise as more dollars are needed to be sent abroad.
The former still holds true today, the latter….not so much. Due primarily to the success of horizontal drilling and fracking technology, the U.S. shale revolution has dramatically increased domestic petroleum production.
In fact, the United States became a net exporter of refined petroleum products in 2011, and has now has become THE largest producer of crude oil overtaking Saudi Arabia and Russia!
In fact, the United States became a net exporter of refined petroleum products in 2011, and has now has become THE largest producer of crude oil overtaking Saudi Arabia and Russia!
According to the Energy Information and Administration (EIA), the United States is now about 90% self-sufficient in terms of total energy consumption.
The technological breakthrough of fracking has disrupted the status quo in the oil market, much like how Kylie Jenner’s Lip Kits disrupted the status quo in the cosmetic industry.
As U.S. oil exports have increased, oil imports have decreased. This means that higher oil prices no longer contribute to a higher U.S. trade deficit, and actually helps to decrease it.
As a result, we’ve seen the historically strong inverse relationship between oil prices and the U.S. dollar is becoming more unstable.
☝️The United States has become the new swing producer of oil, meaning that its production levels hold the most influence over global oil prices. Before the shale revolution, it was Saudi Arabia.
The U.S. may start to trade more like a petrocurrency in the years to come. As the US continues to grow the share of oil exports over imports, revenue from oil will play a greater role in the U.S. economy and the U.S. dollar may start behaving like a petrocurrency….meaning when oil prices goes up, so does the currency.
Understanding why the dollar has historically traded inversely to the price of oil and why the correlation has weakened recently can help traders make more informed trading decisions as the global economy continues to evolve.
The technological breakthrough of fracking has disrupted the status quo in the oil market, much like how Kylie Jenner’s Lip Kits disrupted the status quo in the cosmetic industry.
As U.S. oil exports have increased, oil imports have decreased. This means that higher oil prices no longer contribute to a higher U.S. trade deficit, and actually helps to decrease it.
As a result, we’ve seen the historically strong inverse relationship between oil prices and the U.S. dollar is becoming more unstable.
☝️The United States has become the new swing producer of oil, meaning that its production levels hold the most influence over global oil prices. Before the shale revolution, it was Saudi Arabia.
The U.S. may start to trade more like a petrocurrency in the years to come. As the US continues to grow the share of oil exports over imports, revenue from oil will play a greater role in the U.S. economy and the U.S. dollar may start behaving like a petrocurrency….meaning when oil prices goes up, so does the currency.
Understanding why the dollar has historically traded inversely to the price of oil and why the correlation has weakened recently can help traders make more informed trading decisions as the global economy continues to evolve.
Bond Yields Affect on Currency Movements
A bond is an “IOU” issued by an entity when it needs to borrow money.
These entities, such as governments, municipalities, or multinational companies, need a lot of funds in order to operate so they often need to borrow from banks or individuals like you.
When you own a government bond, in effect, the government has borrowed money from you.
You might be wondering, “Isn’t that the same as owning stocks?”
One major difference is that bonds typically have a defined term to maturity, wherein the owner gets paid back the money he loaned, known as the principal, at a predetermined set date.
Also, when an investor purchases a bond from a company, he gets paid at a specified rate of return, also known as the bond yield, at certain time intervals.
These periodical interest payments are commonly known as coupon payments.
A bond is an “IOU” issued by an entity when it needs to borrow money.
These entities, such as governments, municipalities, or multinational companies, need a lot of funds in order to operate so they often need to borrow from banks or individuals like you.
When you own a government bond, in effect, the government has borrowed money from you.
You might be wondering, “Isn’t that the same as owning stocks?”
One major difference is that bonds typically have a defined term to maturity, wherein the owner gets paid back the money he loaned, known as the principal, at a predetermined set date.
Also, when an investor purchases a bond from a company, he gets paid at a specified rate of return, also known as the bond yield, at certain time intervals.
These periodical interest payments are commonly known as coupon payments.
Bond yield refers to the rate of return or interest paid to the bondholder while the bond price is the amount of money the bondholder pays for the bond.
Now, bond prices and bond yields are inversely correlated. When bond prices rise, bond yields fall and vice-versa.
Here’s a simple illustration to help you remember:☝️
Now, bond prices and bond yields are inversely correlated. When bond prices rise, bond yields fall and vice-versa.
Here’s a simple illustration to help you remember:☝️
Always keep in mind that inter-market relationships govern currency price action.
Bond yields actually serve as an excellent indicator of the strength of a nation’s stock market, which increases the demand for the nation’s currency.
For example, U.S. bond yields gauge the performance of the U.S. stock market, thereby reflecting the demand for the U.S. dollar.
Let’s look at one scenario: Demand for bonds usually increases when investors are concerned about the safety of their stock investments.
This flight to safety drives bond prices higher and, by virtue of their inverse relationship, pushes bond yields down.
☝️Government bond yields act as an indicator of the overall direction of the country’s interest rates and expectations.
For example, in the U.S., you would focus on the 10-year Treasury note.
A rising yield is dollar bullish. A falling yield is dollar bearish.
It’s important to know the underlying dynamic of why a bond’s yield is rising or falling.
It can be based on interest rate expectations OR it can be based on market uncertainty and a “flight to safety” with capital flowing from risky assets like stocks to less risky assets like bonds.
☝️Bond Spreads Between Two Countries Affect Their Exchange Rate
The bond spread represents the difference between two countries’ bond yields.
These differences give rise to carry trade.As the bond spread between two economies widens, the currency of the country with the higher bond yield appreciates against the other currency of the country with the lower bond yield. By monitoring bond spreads and expectations for interest rate changes, you will have an idea where currency pairs are headed..
☝️Fixed Income Securities Affect Currency Movements
As the bond spread or interest rate differential between two economies increases, the currency with the higher bond yield or interest rate generally appreciates against the other.
Fixed income securities (including bonds) are investments that offer a fixed payment at regular time intervals.
Economies that offer higher returns on their fixed income securities should attract more investments.
This would then make their local currency more attractive than those of other economies offering lower returns on their fixed income market.
Bond yields actually serve as an excellent indicator of the strength of a nation’s stock market, which increases the demand for the nation’s currency.
For example, U.S. bond yields gauge the performance of the U.S. stock market, thereby reflecting the demand for the U.S. dollar.
Let’s look at one scenario: Demand for bonds usually increases when investors are concerned about the safety of their stock investments.
This flight to safety drives bond prices higher and, by virtue of their inverse relationship, pushes bond yields down.
☝️Government bond yields act as an indicator of the overall direction of the country’s interest rates and expectations.
For example, in the U.S., you would focus on the 10-year Treasury note.
A rising yield is dollar bullish. A falling yield is dollar bearish.
It’s important to know the underlying dynamic of why a bond’s yield is rising or falling.
It can be based on interest rate expectations OR it can be based on market uncertainty and a “flight to safety” with capital flowing from risky assets like stocks to less risky assets like bonds.
☝️Bond Spreads Between Two Countries Affect Their Exchange Rate
The bond spread represents the difference between two countries’ bond yields.
These differences give rise to carry trade.As the bond spread between two economies widens, the currency of the country with the higher bond yield appreciates against the other currency of the country with the lower bond yield. By monitoring bond spreads and expectations for interest rate changes, you will have an idea where currency pairs are headed..
☝️Fixed Income Securities Affect Currency Movements
As the bond spread or interest rate differential between two economies increases, the currency with the higher bond yield or interest rate generally appreciates against the other.
Fixed income securities (including bonds) are investments that offer a fixed payment at regular time intervals.
Economies that offer higher returns on their fixed income securities should attract more investments.
This would then make their local currency more attractive than those of other economies offering lower returns on their fixed income market.
Here are some of the popular bonds from around the globe and their names
Here’s the general idea:
👉Strong stock market = strong currency.
👉Weak stock market = weak currency.
If you bought the currency from the country with the stronger stock market and sold the currency from the country with the weaker stock market, you can potentially make some nice dough.
Not too familiar with the major global equity indices? It’s your lucky day! Here they are!
Global Equity Markets
Relationship Between Stocks and Forex
One issue with using global equity markets to make forex trading decisions is figuring out which leads which.
The basic theory is that, when a domestic equity market rises, confidence in that specific country grows as well, leading to an inflow of funds from foreign investors.
This tends to create a demand for the domestic currency, causing it to rally versus other foreign currencies.
On the flip side, when a domestic equity market performs terribly, confidence falters, causing investors to convert their invested funds back into their own local currencies.
Sounds great in theory, but in reality, it’s…complicated.
For example, the historical relationship between the U.S. dollar and the S&P 500 hasn’t been consistent.
As shown below, over the last 20 years they have moved together, moved in opposite directions, and have been unrelated.☝️
☝️But that doesn’t mean the relationship is useless. You just have to know when the correlation is working (whether negative or positive) and when it’s not.
Here’s an example where for U.S. and Japan stocks moved in opposite directions of their currencies.
Any upbeat economic figures in the U.S. and Japan more often than not weigh down on their respective currencies, the dollar and yen.
First, let’s take a look at the correlation between the Dow Jones Industrial Average and the Nikkei to see how stock markets all over the globe perform relative to each other.
Since the turn of the century, the Dow Jones Industrial Average and the Nikkei 225, the Japanese stock index, have been moving together like lovers on Valentine’s Day, falling and rising at the same time.
Also notice that sometimes one index leads, rallying or dropping first before being followed by the other index.
It doesn’t happen every single time, but you could say that stock markets in the world generally move in the same direction.
✅When people talk about the stock market, you generally hear them using a stock market index in reference to the market’s performance.
A stock market index is simply a curated list of certain stocks. This list of stocks is a way to get a broad measure of what’s happening in the stock market.
In this lesson, we discuss how currencies can have an effect on two specific stock indexes:
👉The Nikkei 225 more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average is a Japan stock market index that measures the stock performance of Japan’s largest 225 companies listed on the Tokyo Stock Exchange (TSE).
👉The Dow Jones Industrial Average, Dow Jones, or simply the Dow, is a U.S. stock market index that measures the stock performance of 30 large American companies listed on the New York Stock Exchange (NYSE) and the NASDAQ.
Since the turn of the century, the Dow Jones Industrial Average and the Nikkei 225, the Japanese stock index, have been moving together like lovers on Valentine’s Day, falling and rising at the same time.
Also notice that sometimes one index leads, rallying or dropping first before being followed by the other index.
It doesn’t happen every single time, but you could say that stock markets in the world generally move in the same direction.
✅When people talk about the stock market, you generally hear them using a stock market index in reference to the market’s performance.
A stock market index is simply a curated list of certain stocks. This list of stocks is a way to get a broad measure of what’s happening in the stock market.
In this lesson, we discuss how currencies can have an effect on two specific stock indexes:
👉The Nikkei 225 more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average is a Japan stock market index that measures the stock performance of Japan’s largest 225 companies listed on the Tokyo Stock Exchange (TSE).
👉The Dow Jones Industrial Average, Dow Jones, or simply the Dow, is a U.S. stock market index that measures the stock performance of 30 large American companies listed on the New York Stock Exchange (NYSE) and the NASDAQ.
Nikkei and USD/JPY
Before the global economic recession that started in 2007, when most economies suffered consecutive quarters of negative GDP growth, the Nikkei and the USD/JPY were inversely correlated.
Investors believed that the performance of the Japanese stock market reflected the status of the country, so a rally in the Nikkei led to a strengthening of the yen.
The opposite also held true. Whenever the Nikkei would drop, USD/JPY would rise as well.
Before the global economic recession that started in 2007, when most economies suffered consecutive quarters of negative GDP growth, the Nikkei and the USD/JPY were inversely correlated.
Investors believed that the performance of the Japanese stock market reflected the status of the country, so a rally in the Nikkei led to a strengthening of the yen.
The opposite also held true. Whenever the Nikkei would drop, USD/JPY would rise as well.
Correlation Between USD/JPY and Dow
Let’s take a look at the correlation between the USD/JPY and the Dow.
Generally, the strength or weakness of the dollar, impacts the U.S. stock market, particularly stocks of large multi-national corporations (MNCs).
For large U.S. multinationals that sell goods and services overseas, a rising U.S. dollar can put a crimp into the profits.
If the dollar is strong, it makes a difference for those companies since it makes it difficult for them to increase prices or even maintain sales at current levels.
That said, you might assume that the USD/JPY and Dow would be highly correlated.
However, a look at the chart below would tell you that it isn’t quite the case. While the correlation is positive, it isn’t as strong.
☝️Take a look at the Dow (blue line).
It peaked at 14,000 late in 2007 before dropping like a hot potato in 2008.
At the same time, USD/JPY (orange line) also fell, but not as sharply as the Dow.
This serves as a reminder that we should always take into account fundamentals, technicals, and market sentiment, so always read up!
Don’t take correlations for granted because they aren’t a sure-fire thing!
Let’s take a look at the correlation between the USD/JPY and the Dow.
Generally, the strength or weakness of the dollar, impacts the U.S. stock market, particularly stocks of large multi-national corporations (MNCs).
For large U.S. multinationals that sell goods and services overseas, a rising U.S. dollar can put a crimp into the profits.
If the dollar is strong, it makes a difference for those companies since it makes it difficult for them to increase prices or even maintain sales at current levels.
That said, you might assume that the USD/JPY and Dow would be highly correlated.
However, a look at the chart below would tell you that it isn’t quite the case. While the correlation is positive, it isn’t as strong.
☝️Take a look at the Dow (blue line).
It peaked at 14,000 late in 2007 before dropping like a hot potato in 2008.
At the same time, USD/JPY (orange line) also fell, but not as sharply as the Dow.
This serves as a reminder that we should always take into account fundamentals, technicals, and market sentiment, so always read up!
Don’t take correlations for granted because they aren’t a sure-fire thing!
How to Use EUR/JPY as a Leading Indicator for Stocks
EUR/JPY seems to be highly correlated with stock markets across the globe.
You should know that the yen, along with the U.S. dollar, are considered to be safe havens amongst the major currencies.
Whenever confidence in the global economy is down and traders are fearful, we typically see traders take their money out of the stock markets, which leads to a drop in the values of the DAX and S&P500.
With money flowing out of these markets, we usually see EUR/JPY fall as traders run for cover.
On the flip side, when the sun is bright and risk appetite is rampant, investors pour their money into stock markets, which in turns leads to a rise in the EUR/JPY.
☝️The correlation seems to have held well this past decade, as EUR/JPY and both indexes rose steadily together, until 2008, when we were hit with the Grear Financial Crisis (GFC).
In late 2007, EUR/JPY had hit its peak, and so did the stock indexes.
✅Intermarket analysis studies the relationships between asset classes, typically currencies, bonds, commodities, and stocks.
It can help traders generate broader trading ideas, reveal potential market turning points, or confirm other analysis methods.
The price action of currencies is often driven by their relationship with commodities, bonds, and stock indices.
For example, here are some traditional intermarket relationships:
A falling U.S. dollar is viewed as positive for commodities prices, while a rising U.S. dollar is considered negative for commodities price.
Falling bond prices/rising interest rates tend to be negative for stocks, while rising bond prices/falling interest rates are normally good for stocks,
Rising commodities prices are historically a sign of economic growth which is good for the stock market and negative for bond prices.
Here’s a neat two-page for you to save and make it easy for yourself!
EUR/JPY seems to be highly correlated with stock markets across the globe.
You should know that the yen, along with the U.S. dollar, are considered to be safe havens amongst the major currencies.
Whenever confidence in the global economy is down and traders are fearful, we typically see traders take their money out of the stock markets, which leads to a drop in the values of the DAX and S&P500.
With money flowing out of these markets, we usually see EUR/JPY fall as traders run for cover.
On the flip side, when the sun is bright and risk appetite is rampant, investors pour their money into stock markets, which in turns leads to a rise in the EUR/JPY.
☝️The correlation seems to have held well this past decade, as EUR/JPY and both indexes rose steadily together, until 2008, when we were hit with the Grear Financial Crisis (GFC).
In late 2007, EUR/JPY had hit its peak, and so did the stock indexes.
✅Intermarket analysis studies the relationships between asset classes, typically currencies, bonds, commodities, and stocks.
It can help traders generate broader trading ideas, reveal potential market turning points, or confirm other analysis methods.
The price action of currencies is often driven by their relationship with commodities, bonds, and stock indices.
For example, here are some traditional intermarket relationships:
A falling U.S. dollar is viewed as positive for commodities prices, while a rising U.S. dollar is considered negative for commodities price.
Falling bond prices/rising interest rates tend to be negative for stocks, while rising bond prices/falling interest rates are normally good for stocks,
Rising commodities prices are historically a sign of economic growth which is good for the stock market and negative for bond prices.
Here’s a neat two-page for you to save and make it easy for yourself!
Guide to Major Economies
For each country that we will be touring, we’ll start off with a quick peek at the important facts and figures, followed by an overview of its economy.
Once that’s out of the way, we’ll visit the country’s central bank to find out some of their secrets.
In this section, we will explore the powerful monetary policy tools central banks employ to control the country’s economy.
Hopefully, we’ll stumble into the room where they keep their printing plates and we can sneak out the back door and sell it on the black market.After that, we’ll discuss the important characteristics that differentiate that country’s local currency from all the rest, as well as hard-hitting economic indicators for that country.
The United States of America is comprised of 50 states and a federal district.
The majority of the country can be found in North America, but the United States also has some territories in the Pacific.
Since its independence from the U.K. on the Fourth of July back in 1776, the U.S. has become an economic superpower not just in the West but also in the whole world.
Being the world’s largest economy, the U.S. plays a serious role in the global market.
Just about any economic development in the U.S., such as a rise or fall in consumer spending or an affair by its President, that is made public, could create quite a hefty impact on economies all over the world!
☝️The U.S. is widely considered to be the richest country in the world, producing about $16.24 trillion in output in 2012. It ranked 13th in 2012 in terms of per capita income – that’s just the country’s total income divided by its population – of about $51,700 in a year.
The U.S.’s main industries are aircraft, automobiles, transistors, telecom equipment, and other industrial materials. Although it might seem that the US economy is heavily oriented towards the manufacturing of physical goods, 70% of its output actually comes from the services sector!
Speaking of trade, one key element of the U.S. economy is that the country is notorious for running huge trade deficits (i.e., the total value of goods flowing into the country is more than the total value of those going out).
The U.S. is also home to the New York Stock Exchange, which is the largest stock exchange in the world. It is also home to the world’s largest bond market, with a market capitalization of over $31 trillion and over $822 billion in bonds traded daily on average.
Being the top economy in the world in today’s globalized market, any domestic event affecting the U.S. also has the potential to affect markets around the world… Yes, even the foreign exchange market!
✅The Federal Reserve Board, more commonly called the Fed, is the U.S.’s main governing body when it comes to setting and implementing monetary policy.
Monetary policy is just the way the Fed controls the availability and supply of money in the economy and what makes the Fed special from other central banks is that its objectives are based on longer-term effects of its monetary policy.
The Fed has two main objectives. The first one is keeping the prices of consumer goods and services stable and the second one is making sure that there is sustainable economic growth.
In other words, the Fed just wants to make sure that yo Benjies doesn’t lose value and yo momma and poppa have jobs!
Within the Fed is the Federal Open Market Committee (FOMC). Currently led by Fed Governor, Jerome Powell, the FOMC is tasked to make sound and rational decisions on monetary policy.
The FOMC has two main weapons to use in its battle against inflation and achieve its long-term objectives: open market operations and the Fed’s Funds Rate.
☝️Over the past few decades, the Fed and the U.S. Treasury have kept a “strong dollar” policy.
They believe that monetary and fiscal policy should be geared towards a strong exchange rate of the USD, as it would benefit the U.S. and the rest of the world.
Important Economic Indicators for the USD
👉Non-farm employment change (NFP) – The NFP employment report measures the change in the number of employed people in the prior month.
👉GDP – The Gross Domestic Product (GDP) report is the measure of the country’s total value of all final goods and services.
👉Retail Sales – The headline retail sales report measures the monthly change in the total value of sales at a retail level. The core version of the report, on the other hand, excludes vehicle sales.
👉Consumer Price Index (CPI) – The CPI measures the change in the prices of a fixed basket of goods and services. The core account excludes food and energy prices because of their volatile nature.
👉Personal Consumption Expenditure – This is very similar to the CPI report as it measures the price changes of US consumer goods. The reason why you should look at this report is because this is the one that the Fed looks at when making decisions regarding monetary policy. And we all want to be in cahoots with the experts right?
👉University of Michigan Consumer Sentiment – Every month, the University of Michigan releases its consumer sentiment report.
This index measures the attitude consumers have towards the economy. The more confident consumers are about economic conditions, the more likely they are to spend.
What Moves the USD?
👉The Gold Rush
Whenever the dollar is at risk of losing its value due to inflation, investors turn to gold for safety. Unlike most financial assets, gold maintains its intrinsic value.
Gold is gold is gold – it’s the same everywhere! So when gold prices are rising, it could be a sign that the dollar is losing its appeal.
👉Economic Developments in the U.S.
Fundamentally, positive economic developments in the U.S. attract more participants to invest in the U.S.
An investor would, of course, need to have some dollars to be able to transact in the U.S.
So as the demand for U.S. investments increases, the demand for the greenback rises as well.
👉Capital Inflows and Outflows
With respect to Japan and London, the U.S. probably has the deepest and most advanced financial markets.
This provides the many kings, sultans, billionaires, and heirs around the world many types of investments which they can choose from.
In order to invest in these American assets, investors would first need to convert whatever currency they are holding into U.S. dollars.
👉The capital inflows and outflows from the U.S. financial markets can have a significant effect on the value of the dollar.
👉Economic Developments Around the World
Since the USD takes up about majority daily currency transactions, just about any major development in the world (i.e. strong GDP growth in Australia, a stock market crash in Beijing, or a Godzilla attack in Tokyo) affects its short-term valuation.
👉Bond Yield Differentials
With investors always looking for the best deal for their money, it is important to keep track of the differences in the yields of bonds of the U.S. and other foreign countries.
If investors see that bond yields are rising in foreign countries while yields in the U.S. are staying steady or going lower, investors will move their funds out of U.S. bonds (selling their dollars in the process) and begin purchasing foreign bonds.
👉Rumors on the Interest Rate Grapevine
Market participants pay attention to interest rates trends, and you should too.
If the Fed is expected to raise interest rates, this means that demand for dollar-denominated financial assets (like Treasuries) could rise, which would be bullish for the dollar.
✅USD as the Base Currency
USD/XXX is traded in amounts denominated in USD. Standard lot sizes are 100,000 USD and mini lot sizes are 10,000 USD.
The pip value, which is denominated in XXX, is calculated by dividing 1 pip of the USD/XXX, which would be 0.0001 or 0.01 depending on the pair being talked about, by the USD/XXX current rate.
Profit and loss are denominated in XXX. For one standard lot position size, each pip movement is worth 10 XXX. For one mini lot position size, each pip movement is worth 1 XXX.
For example, if one pip is equal to 0.0001 and the current exchange rate of USD/XXX is 1.4000, one pip of one standard lot would equate to 14 USD.
Margin calculations are based in US dollars. With a leverage of 100:1, 1,000 USD is needed to trade 100,000 USD/CAD.
✅USD as the Quote Currency
XXX/USD is traded in amounts denominated in XXX. Standard lot sizes are 100,000 XXX and mini lot sizes are 10,000 XXX.
The pip value, which is denominated in US dollars, is calculated by dividing 1 pip of the XXX/USD (0.0001 or 0.01 depending on the pair) by the XXX/USD’s current rate.
Profit and loss are denominated in U.S. dollars.
For one standard lot position size, each pip movement is worth 10 USD.
For one mini lot position size, each pip movement is worth 1 USD.
Margin calculations are based in US dollars. For example, if the current XXX/USD rate is 0.8900 and the leverage is 100:1, 890 USD is needed in available margin to be able to trade on standard lot of 100,000 XXX.
However, the as the XXX/USD rate increases, a larger available margin in USD is required. Conversely, the lower the XXX/USD rate is, the less required available margin is needed.
The majority of the country can be found in North America, but the United States also has some territories in the Pacific.
Since its independence from the U.K. on the Fourth of July back in 1776, the U.S. has become an economic superpower not just in the West but also in the whole world.
Being the world’s largest economy, the U.S. plays a serious role in the global market.
Just about any economic development in the U.S., such as a rise or fall in consumer spending or an affair by its President, that is made public, could create quite a hefty impact on economies all over the world!
☝️The U.S. is widely considered to be the richest country in the world, producing about $16.24 trillion in output in 2012. It ranked 13th in 2012 in terms of per capita income – that’s just the country’s total income divided by its population – of about $51,700 in a year.
The U.S.’s main industries are aircraft, automobiles, transistors, telecom equipment, and other industrial materials. Although it might seem that the US economy is heavily oriented towards the manufacturing of physical goods, 70% of its output actually comes from the services sector!
Speaking of trade, one key element of the U.S. economy is that the country is notorious for running huge trade deficits (i.e., the total value of goods flowing into the country is more than the total value of those going out).
The U.S. is also home to the New York Stock Exchange, which is the largest stock exchange in the world. It is also home to the world’s largest bond market, with a market capitalization of over $31 trillion and over $822 billion in bonds traded daily on average.
Being the top economy in the world in today’s globalized market, any domestic event affecting the U.S. also has the potential to affect markets around the world… Yes, even the foreign exchange market!
✅The Federal Reserve Board, more commonly called the Fed, is the U.S.’s main governing body when it comes to setting and implementing monetary policy.
Monetary policy is just the way the Fed controls the availability and supply of money in the economy and what makes the Fed special from other central banks is that its objectives are based on longer-term effects of its monetary policy.
The Fed has two main objectives. The first one is keeping the prices of consumer goods and services stable and the second one is making sure that there is sustainable economic growth.
In other words, the Fed just wants to make sure that yo Benjies doesn’t lose value and yo momma and poppa have jobs!
Within the Fed is the Federal Open Market Committee (FOMC). Currently led by Fed Governor, Jerome Powell, the FOMC is tasked to make sound and rational decisions on monetary policy.
The FOMC has two main weapons to use in its battle against inflation and achieve its long-term objectives: open market operations and the Fed’s Funds Rate.
☝️Over the past few decades, the Fed and the U.S. Treasury have kept a “strong dollar” policy.
They believe that monetary and fiscal policy should be geared towards a strong exchange rate of the USD, as it would benefit the U.S. and the rest of the world.
Important Economic Indicators for the USD
👉Non-farm employment change (NFP) – The NFP employment report measures the change in the number of employed people in the prior month.
👉GDP – The Gross Domestic Product (GDP) report is the measure of the country’s total value of all final goods and services.
👉Retail Sales – The headline retail sales report measures the monthly change in the total value of sales at a retail level. The core version of the report, on the other hand, excludes vehicle sales.
👉Consumer Price Index (CPI) – The CPI measures the change in the prices of a fixed basket of goods and services. The core account excludes food and energy prices because of their volatile nature.
👉Personal Consumption Expenditure – This is very similar to the CPI report as it measures the price changes of US consumer goods. The reason why you should look at this report is because this is the one that the Fed looks at when making decisions regarding monetary policy. And we all want to be in cahoots with the experts right?
👉University of Michigan Consumer Sentiment – Every month, the University of Michigan releases its consumer sentiment report.
This index measures the attitude consumers have towards the economy. The more confident consumers are about economic conditions, the more likely they are to spend.
What Moves the USD?
👉The Gold Rush
Whenever the dollar is at risk of losing its value due to inflation, investors turn to gold for safety. Unlike most financial assets, gold maintains its intrinsic value.
Gold is gold is gold – it’s the same everywhere! So when gold prices are rising, it could be a sign that the dollar is losing its appeal.
👉Economic Developments in the U.S.
Fundamentally, positive economic developments in the U.S. attract more participants to invest in the U.S.
An investor would, of course, need to have some dollars to be able to transact in the U.S.
So as the demand for U.S. investments increases, the demand for the greenback rises as well.
👉Capital Inflows and Outflows
With respect to Japan and London, the U.S. probably has the deepest and most advanced financial markets.
This provides the many kings, sultans, billionaires, and heirs around the world many types of investments which they can choose from.
In order to invest in these American assets, investors would first need to convert whatever currency they are holding into U.S. dollars.
👉The capital inflows and outflows from the U.S. financial markets can have a significant effect on the value of the dollar.
👉Economic Developments Around the World
Since the USD takes up about majority daily currency transactions, just about any major development in the world (i.e. strong GDP growth in Australia, a stock market crash in Beijing, or a Godzilla attack in Tokyo) affects its short-term valuation.
👉Bond Yield Differentials
With investors always looking for the best deal for their money, it is important to keep track of the differences in the yields of bonds of the U.S. and other foreign countries.
If investors see that bond yields are rising in foreign countries while yields in the U.S. are staying steady or going lower, investors will move their funds out of U.S. bonds (selling their dollars in the process) and begin purchasing foreign bonds.
👉Rumors on the Interest Rate Grapevine
Market participants pay attention to interest rates trends, and you should too.
If the Fed is expected to raise interest rates, this means that demand for dollar-denominated financial assets (like Treasuries) could rise, which would be bullish for the dollar.
✅USD as the Base Currency
USD/XXX is traded in amounts denominated in USD. Standard lot sizes are 100,000 USD and mini lot sizes are 10,000 USD.
The pip value, which is denominated in XXX, is calculated by dividing 1 pip of the USD/XXX, which would be 0.0001 or 0.01 depending on the pair being talked about, by the USD/XXX current rate.
Profit and loss are denominated in XXX. For one standard lot position size, each pip movement is worth 10 XXX. For one mini lot position size, each pip movement is worth 1 XXX.
For example, if one pip is equal to 0.0001 and the current exchange rate of USD/XXX is 1.4000, one pip of one standard lot would equate to 14 USD.
Margin calculations are based in US dollars. With a leverage of 100:1, 1,000 USD is needed to trade 100,000 USD/CAD.
✅USD as the Quote Currency
XXX/USD is traded in amounts denominated in XXX. Standard lot sizes are 100,000 XXX and mini lot sizes are 10,000 XXX.
The pip value, which is denominated in US dollars, is calculated by dividing 1 pip of the XXX/USD (0.0001 or 0.01 depending on the pair) by the XXX/USD’s current rate.
Profit and loss are denominated in U.S. dollars.
For one standard lot position size, each pip movement is worth 10 USD.
For one mini lot position size, each pip movement is worth 1 USD.
Margin calculations are based in US dollars. For example, if the current XXX/USD rate is 0.8900 and the leverage is 100:1, 890 USD is needed in available margin to be able to trade on standard lot of 100,000 XXX.
However, the as the XXX/USD rate increases, a larger available margin in USD is required. Conversely, the lower the XXX/USD rate is, the less required available margin is needed.
Eurozone
The European Union (EU) is a brotherhood of 27-member states which started from a tiny gang of six neighboring states in 1951.
By the magical powers of the Treaty of Maastricht, it then grew into a large economic and political bloc, making it the largest economic region in the world.
Talk about playing a huge role in international trade and global economic affairs!
Among these EU member states, 19 countries adopted the euro (EUR) as their common currency.
These nations comprise the euro zone, which is also called the European Monetary Union (EMU) or Euroland.
Members of this elite club are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Aside from adopting a common currency, these nations also share the same monetary policy set by the European Central Bank (ECB).
✅The euro zone, which comprises more than half of the nations in the EU, ranks as the largest economy with a GDP of $18.45 trillion in 2011. Being a services-oriented economy, services account for a whopping 70% of its GDP!
On top of that, the eurozone takes pride in being the second most attractive investment market for domestic and international investors.
As an economic union, the euro zone has a standardized system of laws, particularly for trade. The size of their entire economy makes the euro zone a major player in the international trade arena.
Because the individual countries are grouped as one entity, it enables them to facilitate trade easier, mostly with its number one trade partner, the U.S.
This active participation in international trade also has a significant impact on the role of the EUR as a reserve currency.
This is because countries who transact with the euro zone need to have a significant amount of reserve currencies in order to reduce exchange rate risk and minimize transaction costs.
👉Monetary & Fiscal Policy
The European Central Bank (ECB) acts as the governing body for the monetary policy of the EU. Led by the current ECB President Christine Lagarde, the Executive Board also consists of the ECB Vice President and four other policymakers.
Along with the top guns from the national central banks within the euro zone, they make up the ECB Governing Council who vote on monetary policy changes.
The main objective of the ECB is to maintain price stability in the entire region – quite a tall order! To achieve this goal, the eurozone signed the Maastricht Treaty which applied a certain set of criteria for the member nations. Here are some of the requirements:
The nation’s inflation rate must not exceed the average inflation of the three best performing (lowest inflation rates) states by more than 1.5%.
Their long-term interest rates must not exceed the average rates of these low-inflation states by more than 2%.
Exchange rates must stay within the range of the exchange rate mechanism for at least a couple of years.
Their government deficit must be less than 3% of their GDP.
If a nation fails to meet these conditions, they are penalized with a hefty fine.
👉The ECB also makes use of its minimum bid rate and open market operations as its monetary policy tools. The ECB minimum bid rate or repo rate is the rate of return the central bank offers to the central banks of its member states. They make use of this rate to control inflation.
Open market operations, on the other hand, are used to manage interest rates, control liquidity, and establish monetary policy stance. Such operations are conducted through buying or selling of government securities in the market.
In order to increase liquidity, the ECB buys securities and pays with euros, which then gets circulated. Conversely, to mop up excess liquidity, the ECB sells securities in exchange for euros.
Conversely, to mop up excess liquidity, the ECB sells securities in exchange for euros.
Other than making use of those monetary policy tools, the ECB can also opt to intervene in the foreign exchange market to further cap inflation. Because of this, traders pay close attention to comments from the Governing Council members since these could impact the EUR.
Important Economic Indicators for the euro
👉Gross Domestic Product – Gross domestic product is the central measure of economic growth in the region. Since Germany is the largest economy in the euro zone, its GDP tends to move the euro the most.
👉Employment Change – The euro is also sensitive to changes in employment, particularly in the euro zone’s largest economies like Germany and France.
👉German Industrial Production – This measures the change in the volume of output from Germany’s manufacturing, mining, and quarrying industries. Because of this, it reflects the short-term strength of German industrial activity.
👉German IFO Business Climate Survey – This is one of the country’s key business surveys. Conducted monthly, this takes into account the current business situation of Germany as well as expectations for future conditions.
👉Budget Deficits – Recall that one of the criteria in the Maastricht Treaty requires that euro zone economies keep their debt-to-GDP ratio below 60% and their deficit less than 3% of its annual GDP.
Failure to achieve these targets could result in fiscal instability in the euro zone.
👉Consumer Price Index – Since one of the goals of the ECB is to maintain price stability, they keep an eye on inflation indicators such as the CPI.
If the annual CPI deviates from the central bank target, the ECB could make use of its monetary policy tools to keep inflation in check.
What Moves the EUR?
👉Eurozone Fundamentals
Reports of strong economic performance by the euro zone as a whole, or by its member nations, can boost the euro higher. For instance, better than expected GDP reports from Germany or France could encourage traders to be bullish on the euro.
👉Uncle Sam’s Groovy Moves
Sudden changes in market sentiment, buoyed mostly by U.S. economic data, tend to have a huge impact on EUR/USD.
Being considered the anti-dollar, the euro is also swayed by talks of reserve diversification away from the U.S. dollar. Euro as the new reserve currency, anyone?
👉Differences in Rates of Return
The bond spread between 10-year U.S. government bonds and 10-year Bunds (German bonds) usually indicate the direction of EUR/USD.
If the difference between the yields of the U.S. bonds and Bunds widens, EUR/USD moves in favor of the currency with the higher yield.
Similar to bond yields, interest rate differentials also serve as an excellent indicator of the EUR/USD movement. For instance, traders usually compare the Euribor futures rate with the Eurodollar futures rate.
The European Union (EU) is a brotherhood of 27-member states which started from a tiny gang of six neighboring states in 1951.
By the magical powers of the Treaty of Maastricht, it then grew into a large economic and political bloc, making it the largest economic region in the world.
Talk about playing a huge role in international trade and global economic affairs!
Among these EU member states, 19 countries adopted the euro (EUR) as their common currency.
These nations comprise the euro zone, which is also called the European Monetary Union (EMU) or Euroland.
Members of this elite club are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Aside from adopting a common currency, these nations also share the same monetary policy set by the European Central Bank (ECB).
✅The euro zone, which comprises more than half of the nations in the EU, ranks as the largest economy with a GDP of $18.45 trillion in 2011. Being a services-oriented economy, services account for a whopping 70% of its GDP!
On top of that, the eurozone takes pride in being the second most attractive investment market for domestic and international investors.
As an economic union, the euro zone has a standardized system of laws, particularly for trade. The size of their entire economy makes the euro zone a major player in the international trade arena.
Because the individual countries are grouped as one entity, it enables them to facilitate trade easier, mostly with its number one trade partner, the U.S.
This active participation in international trade also has a significant impact on the role of the EUR as a reserve currency.
This is because countries who transact with the euro zone need to have a significant amount of reserve currencies in order to reduce exchange rate risk and minimize transaction costs.
👉Monetary & Fiscal Policy
The European Central Bank (ECB) acts as the governing body for the monetary policy of the EU. Led by the current ECB President Christine Lagarde, the Executive Board also consists of the ECB Vice President and four other policymakers.
Along with the top guns from the national central banks within the euro zone, they make up the ECB Governing Council who vote on monetary policy changes.
The main objective of the ECB is to maintain price stability in the entire region – quite a tall order! To achieve this goal, the eurozone signed the Maastricht Treaty which applied a certain set of criteria for the member nations. Here are some of the requirements:
The nation’s inflation rate must not exceed the average inflation of the three best performing (lowest inflation rates) states by more than 1.5%.
Their long-term interest rates must not exceed the average rates of these low-inflation states by more than 2%.
Exchange rates must stay within the range of the exchange rate mechanism for at least a couple of years.
Their government deficit must be less than 3% of their GDP.
If a nation fails to meet these conditions, they are penalized with a hefty fine.
👉The ECB also makes use of its minimum bid rate and open market operations as its monetary policy tools. The ECB minimum bid rate or repo rate is the rate of return the central bank offers to the central banks of its member states. They make use of this rate to control inflation.
Open market operations, on the other hand, are used to manage interest rates, control liquidity, and establish monetary policy stance. Such operations are conducted through buying or selling of government securities in the market.
In order to increase liquidity, the ECB buys securities and pays with euros, which then gets circulated. Conversely, to mop up excess liquidity, the ECB sells securities in exchange for euros.
Conversely, to mop up excess liquidity, the ECB sells securities in exchange for euros.
Other than making use of those monetary policy tools, the ECB can also opt to intervene in the foreign exchange market to further cap inflation. Because of this, traders pay close attention to comments from the Governing Council members since these could impact the EUR.
Important Economic Indicators for the euro
👉Gross Domestic Product – Gross domestic product is the central measure of economic growth in the region. Since Germany is the largest economy in the euro zone, its GDP tends to move the euro the most.
👉Employment Change – The euro is also sensitive to changes in employment, particularly in the euro zone’s largest economies like Germany and France.
👉German Industrial Production – This measures the change in the volume of output from Germany’s manufacturing, mining, and quarrying industries. Because of this, it reflects the short-term strength of German industrial activity.
👉German IFO Business Climate Survey – This is one of the country’s key business surveys. Conducted monthly, this takes into account the current business situation of Germany as well as expectations for future conditions.
👉Budget Deficits – Recall that one of the criteria in the Maastricht Treaty requires that euro zone economies keep their debt-to-GDP ratio below 60% and their deficit less than 3% of its annual GDP.
Failure to achieve these targets could result in fiscal instability in the euro zone.
👉Consumer Price Index – Since one of the goals of the ECB is to maintain price stability, they keep an eye on inflation indicators such as the CPI.
If the annual CPI deviates from the central bank target, the ECB could make use of its monetary policy tools to keep inflation in check.
What Moves the EUR?
👉Eurozone Fundamentals
Reports of strong economic performance by the euro zone as a whole, or by its member nations, can boost the euro higher. For instance, better than expected GDP reports from Germany or France could encourage traders to be bullish on the euro.
👉Uncle Sam’s Groovy Moves
Sudden changes in market sentiment, buoyed mostly by U.S. economic data, tend to have a huge impact on EUR/USD.
Being considered the anti-dollar, the euro is also swayed by talks of reserve diversification away from the U.S. dollar. Euro as the new reserve currency, anyone?
👉Differences in Rates of Return
The bond spread between 10-year U.S. government bonds and 10-year Bunds (German bonds) usually indicate the direction of EUR/USD.
If the difference between the yields of the U.S. bonds and Bunds widens, EUR/USD moves in favor of the currency with the higher yield.
Similar to bond yields, interest rate differentials also serve as an excellent indicator of the EUR/USD movement. For instance, traders usually compare the Euribor futures rate with the Eurodollar futures rate.
United Kingdom
The United Kingdom is a land of many accents as it is actually composed of four countries – England, Northern Ireland, Scotland, and Wales.
Headed by the Queen, the U.K. is considered a constitutional monarchy but is governed through a parliamentary system that is based in England’s capital of London.
The U.K. is also part of the European Union. However, the U.K. has refused to join the eurozone and is adamant about using the pound as its currency.
Unfortunately, this means that having a Schengen visa won’t let you travel through the U.K., you have to get a separate visa!
Important Economic Indicators for the GBP
👉Consumer Price Index (CPI) – The BOE looks at this account as a measure of inflation. It measures the change in prices of consumer goods.
👉Unemployment Rate – This is the measure of how many unemployed people there are in the UK economy. Analysts look at this account carefully because it could be a leading indicator of future spending.
How come? Well, if a person has no job, he has no money. Without any money, nobody would be able to afford tea time!
👉Gross Domestic Product (GDP) – This figure reflects the state of the UK economy. It indicates whether the economy is growing and booming, or if it is stuck in the English Channel and drowning.
👉Purchasing Managers Index (PMI) – This index surveys business managers and asks them their view of the current economic landscape. Scores above 50.0 indicate improving conditions which may lead to expansion, while scores below 50.0 hint at possible contraction.
👉Gfk Consumer Confidence report -This report gauges consumers’ confidence about current and future economic conditions.
The more confident consumers are regarding the state of the UK economy, the more likely that they will be willing to spend.
What Moves the GBP
👉Changes in Monetary Policy
Many investors look at the pound for higher-yielding assets and for carry trades. Changes in the MPC’s interest rate alter sentiment towards the pound as it affects the yield of British securities.
In addition, changes in the bank repo rate also reveal the BOE’s outlook on the economy.
If the BOE officials feel that the economy is hurting, they will either expand quantitative easing measures or cut interest rates, which will signal to the public that the economy is unstable.
If the BOE feels that the economy’s rise may lead to inflationary pressures down the road, they may cut back on quantitative easing or hike interest rates.
👉Developments in the eurozone and US
Like other currency pairs, GBP/USD is also heavily affected by developments in the euro zone and U.S. U.S. economic data directly affect investors’ and traders’ sentiment in the market.
👉Good or bad data from the U.S. can either send market participants running to the GBP on increased risk appetite or looking for safety in the USD on account of risk aversion.
👉The Spill Over Effect
The euro zone accounts for a majority of the U.K.’s trade relations. Because of this, you should also keep your binoculars ready to see any developments over in the mainland (Remember, the U.K. is an island!).
Any bad news or poor economic performance could potentially lead to bearish sentiment towards the GBP.
👉Driven by Risk Sentiment
Albeit small, the GBP benefits from the fact that it boats a higher interest rate amongst other major currencies.
When traders are in search of greater yields, they will look to the U.K. because of the potential of getting a higher return on their investments.
When traders want to unwind their high-yielding investments and look for USD-dearest, they will start selling off the GBP.
The United Kingdom is a land of many accents as it is actually composed of four countries – England, Northern Ireland, Scotland, and Wales.
Headed by the Queen, the U.K. is considered a constitutional monarchy but is governed through a parliamentary system that is based in England’s capital of London.
The U.K. is also part of the European Union. However, the U.K. has refused to join the eurozone and is adamant about using the pound as its currency.
Unfortunately, this means that having a Schengen visa won’t let you travel through the U.K., you have to get a separate visa!
Important Economic Indicators for the GBP
👉Consumer Price Index (CPI) – The BOE looks at this account as a measure of inflation. It measures the change in prices of consumer goods.
👉Unemployment Rate – This is the measure of how many unemployed people there are in the UK economy. Analysts look at this account carefully because it could be a leading indicator of future spending.
How come? Well, if a person has no job, he has no money. Without any money, nobody would be able to afford tea time!
👉Gross Domestic Product (GDP) – This figure reflects the state of the UK economy. It indicates whether the economy is growing and booming, or if it is stuck in the English Channel and drowning.
👉Purchasing Managers Index (PMI) – This index surveys business managers and asks them their view of the current economic landscape. Scores above 50.0 indicate improving conditions which may lead to expansion, while scores below 50.0 hint at possible contraction.
👉Gfk Consumer Confidence report -This report gauges consumers’ confidence about current and future economic conditions.
The more confident consumers are regarding the state of the UK economy, the more likely that they will be willing to spend.
What Moves the GBP
👉Changes in Monetary Policy
Many investors look at the pound for higher-yielding assets and for carry trades. Changes in the MPC’s interest rate alter sentiment towards the pound as it affects the yield of British securities.
In addition, changes in the bank repo rate also reveal the BOE’s outlook on the economy.
If the BOE officials feel that the economy is hurting, they will either expand quantitative easing measures or cut interest rates, which will signal to the public that the economy is unstable.
If the BOE feels that the economy’s rise may lead to inflationary pressures down the road, they may cut back on quantitative easing or hike interest rates.
👉Developments in the eurozone and US
Like other currency pairs, GBP/USD is also heavily affected by developments in the euro zone and U.S. U.S. economic data directly affect investors’ and traders’ sentiment in the market.
👉Good or bad data from the U.S. can either send market participants running to the GBP on increased risk appetite or looking for safety in the USD on account of risk aversion.
👉The Spill Over Effect
The euro zone accounts for a majority of the U.K.’s trade relations. Because of this, you should also keep your binoculars ready to see any developments over in the mainland (Remember, the U.K. is an island!).
Any bad news or poor economic performance could potentially lead to bearish sentiment towards the GBP.
👉Driven by Risk Sentiment
Albeit small, the GBP benefits from the fact that it boats a higher interest rate amongst other major currencies.
When traders are in search of greater yields, they will look to the U.K. because of the potential of getting a higher return on their investments.
When traders want to unwind their high-yielding investments and look for USD-dearest, they will start selling off the GBP.
Japan
Japan is an archipelago of 6,852 islands, although a majority of its landmass is accounted for by the 4 largest islands.
Despite being a relatively small country, Japan’s capital, Tokyo, is home to 36 million hard-working citizens, making it the largest metropolitan area in the globe.
Also, even though Japan is densely populated, the Japanese have one of the highest standards of living, while also having the highest life expectancy in the world.
Japan is also one of the most advanced and tech-friendly countries in the world. Can you imagine a world without the karaoke, the Gameboy or a Prius?
Also, did you know that the Japanese characters that make up Japan’s name mean sun-origin and that Japan is often referred to as the “Land of the Rising Sun”?
Important Economic Indicators for the JPY
👉Gross Domestic Product – This measures the economic activity of Japan. It indicates whether the economy is red hot like lava from Mt. Fuji, or if it’s in the process of harakiri.
👉Tankan Surveys – These reports survey managers from a broad range of industries, questioning them on their views of the economy. Rising sentiment (scores above 0.0) indicate that Japanese businessmen expect business activity to pick up. Scores below 0.0 suggest otherwise.
👉Trade Balance – The Japanese economy is heavily export-dependent. Falling export numbers could lead to a decline in economic activity.
👉Unemployment Rate – This measures the rate of unemployment in Japan. High unemployment could lead to a decline in consumer spending – how would they be able to afford their video games and anime??
👉Consumer Price Index (CPI) – In the past, the Bank of Japan has shown that they are not afraid to make moves to fight off deflation. If trends show that prices of samurai swords and shurikens continue to fall, it may lead to some surprise moves by the BOJ.
👉Core Machinery Orders – A large chunk of Japan’s exports are comprised of machinery orders. The rise or fall in core machinery orders could reflect the current status of Japanese trade.
Japan is an archipelago of 6,852 islands, although a majority of its landmass is accounted for by the 4 largest islands.
Despite being a relatively small country, Japan’s capital, Tokyo, is home to 36 million hard-working citizens, making it the largest metropolitan area in the globe.
Also, even though Japan is densely populated, the Japanese have one of the highest standards of living, while also having the highest life expectancy in the world.
Japan is also one of the most advanced and tech-friendly countries in the world. Can you imagine a world without the karaoke, the Gameboy or a Prius?
Also, did you know that the Japanese characters that make up Japan’s name mean sun-origin and that Japan is often referred to as the “Land of the Rising Sun”?
Important Economic Indicators for the JPY
👉Gross Domestic Product – This measures the economic activity of Japan. It indicates whether the economy is red hot like lava from Mt. Fuji, or if it’s in the process of harakiri.
👉Tankan Surveys – These reports survey managers from a broad range of industries, questioning them on their views of the economy. Rising sentiment (scores above 0.0) indicate that Japanese businessmen expect business activity to pick up. Scores below 0.0 suggest otherwise.
👉Trade Balance – The Japanese economy is heavily export-dependent. Falling export numbers could lead to a decline in economic activity.
👉Unemployment Rate – This measures the rate of unemployment in Japan. High unemployment could lead to a decline in consumer spending – how would they be able to afford their video games and anime??
👉Consumer Price Index (CPI) – In the past, the Bank of Japan has shown that they are not afraid to make moves to fight off deflation. If trends show that prices of samurai swords and shurikens continue to fall, it may lead to some surprise moves by the BOJ.
👉Core Machinery Orders – A large chunk of Japan’s exports are comprised of machinery orders. The rise or fall in core machinery orders could reflect the current status of Japanese trade.
Coming next Forex Expert Level 2 will talk about;
1)Trading Plan
2)Trading Discipline the Key to Consistent Profitability
3)Find A Trading Style That Suits Your Personality
4)What is Your Motivation to Be a Forex Trader?
5)Your Risk Capital
6)Forex Trading Software, Hardware, And Other Tools
7)21 Questions You Should Answer In Your Trading Plan
8)Stick With Your Trading Plan
9)Different Types Of Trading Styles
10)Scalping
11)Day Trading
12)Swing Trading
13)Position Trading
14)Create A Mechanical Trading System
15)Trading System
16)Trading System in 3 Steps
17)So Easy It’s Ridiculous” Trading System
18)Forex Trading Journal
19)Trading Performance Statistics
20)Analyze all the data in the journal
Stay tuned
@Michael Malata 🙏
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