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| Dispelling
currency myths with a little knowledge |
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| Ask any currency
dealer what makes him laugh and once you get past the lists of stand-up
comics and television sit-coms and have laughed about certain unrepeatable
pieces of market slang, the myths that their clients state as unquestionable
fact will be mentioned at some point. These urban myths are heard in every
dealing room in the world and traders will store them in quote books to
be recounted at every opportunity. |
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| Astutely buying
and selling any product calls for expertise and experience and requires
a thorough understanding of the market involved. It is to be expected that
the workings of the currency market, seen from the outside, will look like
pretty simple mechanical functions but the pace of exchange rate movements
and the diversity of the external influences on currency values make the
process surprisingly complex. |
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| It was probably
Alexander Pope who first coined the phrase, “A little learning is a
dangerous thing” and never a truer word was said. An abridged understanding
of something as multifaceted as the currency market would understandably
give rise to a whole host of ‘truisms’, which are more myth than fact. |
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| I
couldn’t begin to count the number of times I have been told by both private
clients and business people that selling Australian Dollars in December
is a good idea because that’s when all the tourists are visiting downunder;
buying all the Aussie Dollars; making it strong. It is always said with
such certainty and thorough conviction and yet there is absolutely no factual
evidence to support the argument. In fact trying to find a cycle in the
Sterling – Aussie Dollar rate is a pretty tall order at any time. |
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| There is
another myth that appears from time to time and it is the unquestionable
fact that the Pound is always strongest on a Thursday afternoon. To
be fair, it isn’t always the Pound that is mentioned and not always Thursday
afternoon but a certain currency being strong or weak on a certain day
is the general theme. |
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| Such a reliable
trading signal is about as likely as Camelot announcing the winning lottery
numbers each week in advance to give everyone a fair crack at a multi-million
pound win. The currency market is the largest speculative arena in the
world; any trading pattern that stood out like this kind of neon lit sore
thumb would either multiply the number of Billionaires in the world or
stop trade altogether. After all, who would bet against such an obvious
winner? |
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| The currency
markets are never this methodical and exchange rates, whilst they can operate
in broad patterns of sorts, are as erratic as the political and economic
news and views that drive them. This is why it is always worth having the
assistance of a good currency specialist on your side when you are moving
sizable sums across borders to migrate or to purchase property. |
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| The argument
for using a currency specialist is simply the fact that doing so will
dispel the myths, add some logic and strategy to your currency plans and
ensure that you trade at the right time for the right reasons. Trying to
assess the best time to lock in an exchange rate is tricky without the
right information and resources. |
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| The currency
market, like all financial markets, is driven by political and economic
pressures which move exchange rates through the fear and greed of traders.
Traders will sell currencies that they fear might weaken and buy currencies
where they feel there is a gain to be made from their strength. |
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| This cause
and effect was amply illustrated by a number of recent events and the market’s
reaction to those situations. ‘Is the Dollar going up or down?’
is a simple question to ask and really ought to be met with a one word
answer but, before making that assessment, a traders has to contend with
a combination of a multitude of factors and determine whether the question
is being asked about the expected movement today or this week or even this
year. |
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| The answer
may be ‘Up today, sideways for the rest of the week and then declining
over the following six months’ but the forecasting process may involve
any number of variables, some factual, some rumour, some drawn from political
rhetoric and some from the testimony of a central banker. The cause and
effect of each factor has to be assessed in chronological and economic
significance and then – and only then – can a realistic answer be given
to this question. |
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| As an example,
no one was at all surprised that the US Dollar weakened in the days before
hurricane Katrina made landfall on the US coastline. Such a destructive
force and the uncertain outcome of its arrival was bound to have a negative
effect on the US economy and international investors, fearful of the damage
it would do to the US currency, sold their Dollar holdings. This same fear
also caused panic buying amongst oil traders; driving crude oil prices
to historic $70 highs. |
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| After Katrina
blew through the Deep South, the dreadful consequences of the storm became
clear. The loss of life, the economic damage and the restrictions it placed
on America’s oil refining capacity were worse than expected and the US
Dollar remained on the back foot for a week or so. It only began to strengthen
again when economists began to calculate the positive impact of the vast
investment necessary to rebuild the devastated cities in New Orleans, Mississippi
and Louisiana. |
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| When a second
storm, “Rita”, a category 5 hurricane, closed in on the same coastline,
the USD unsurprisingly lost ground again. However, when Rita was downgraded
to a Category 4 storm, Texans were evacuated in their droves and Rita’s
path looked set to miss the main oil production regions; the Dollar began
to rally, pushing the Pound down to $1.75 and the Euro as low as $1.20. |
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| Further North,
Canada, with its oil exports, could expect the economy to benefit from
the hikes in oil prices and that suggested that further interest rate rises
in Canada could be expected. This dragged international investment funds
into Canada and the Canadian Dollar strengthened. |
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| It hit its
strongest level against the US Dollar in 13-½ years and pushed the
GBPCAD rate to the lowest in 11 years, remaining there until UK inflation
spiked up to 2.4%. UK inflation is not immune to the effects of higher
energy prices but the size of the spike did take traders by surprise and
this brought calls for the Bank of England to hike UK interest rates to
stave off further inflation. They seemed to drown out the calls from the
British Retail Consortium and others to lower UK rates to stimulate retail
activity and boost the economy. |
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| The Bank of
England, having only dropped UK interest rates by 0.25% in August, was
very unlikely to lift rates back to 4.75% so soon but that didn’t stop
the enthusiasm of yield hungry investors who piled into the Pound in preference
to the Euro, where interest rates are just 2.0%;. This buying binge caused
increased demand for Sterling and affected a rise in the GBPEUR exchange
rate. |
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| Apart from
the sparse interest rate returns, the Euro was also held back by the uncertain
political situation in Germany where the election result retuned no clear
majority and the sore looser, Gerhard Schroeder, refused to cede control
to his arch rival Angela Merkel despite Mrs Merkel’s party gaining a slim
advantage in seat numbers. Schroeder’s final capitulation took three weeks
of wrangling and kept the Euro on the defensive the whole time. Even when
the deal to allow Mrs Merkel to become Germany’s first female Chancellor
was announced, the Euro remained subdued as analysts awaited details of
the concessions she had undoubtedly been forced to make in order to get
Schroeder to step down. |
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| Meanwhile,
in New Zealand, another election left an equally confused picture where
no overall majority was gained and a scrappy hastily arranged coalition
was shuffled into place. Oddly enough, New Zealand uses a very similar
voting system to Germany and the result was uncannily similar to that seen
between Mrs Merkel and Herr Schroeder. This confusion didn’t weaken
the Kiwi Dollar in the same way that it did the Euro. The NZ economy
is in far better shape than the Eurozone with strong exports, a buoyant
housing market, bustling retail sales and, most importantly, at 6.75%,
one of the highest interest rate returns in the industrialised world. Consequently,
far from rushing away from the Kiwi Dollar, international investors are
clamouring to own them to take advantage of the yield and are even borrowing
funds in lower interest rate environments like Europe, to invest in New
Zealand and make a profit on the interest rate differentials. |
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| As I am sure
you can imagine, it takes a great deal of market knowledge, timely information
and detailed analysis to see all of these influences and determine whether
now is the right time to buy your Dollars or whether there is a better
exchange rate waiting in the wings. Anyone with more than just their holiday
money to exchange would do well to speak with a specialist currency dealer
to assess where, when and how they should swap their funds. |
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| If I may audacious
enough to misquote Alexander Pope, failing to acquire a little knowledge
from someone with a lot of knowledge is a very dangerous thing. |
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