| Trading Currencies: What really
counts is market sentiment |
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| I often hear from new clients that
they are watching the market and will call me when they want to trade.
“That’s great” I say, “where are you watching the rates?”
The usual answer is a combination of the television and internet and certainly
these give a guide to the general market trends but the real market movements
are really not picked up in these media. |
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| In order to test how good the available
data is, I took a day off from trading and tried to follow the currency
market from home, It became very clear that there are a few places out
there in WWW land where it is possible to see either delayed or live exchange
rates, although it is sometimes hard to work out which is which. |
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| However, in order to take advantage
of the best exchange rates, it is imperative to understand the reasons
for the exchange rate movements. The information that is available tends
to be mostly news style factual reporting and the more your search the
more repetitive the information becomes. |
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| Same old same old |
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| After a few hours
of ‘interweb surfication’ as my son has come to term it, you have dozens
of versions of the same news stories with slightly different spins and
slants and, if you can make sense of all the rhetoric, you still only have
a miniscule insight into what really moves the market. This becomes very
clear back in the Dealing Room when before the first letters of the news
stories have being typed, the market has already moved on. |
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| What really counts is market sentiment;
an amorphous barely definable factor that changes the minds of traders
about whether they should buy or sell currencies and, what’s most alarming
is that market sentiment can change direction quicker than a spooked rabbit.
It is essential to remember that the Foreign Exchange market is driven
by speculative flows where hedge funds, banks and institutional investors
are searching the globe for a better interest rate yield or stronger growth
and preferably both. Economic data and Political comment will determine
where they expect that income to come from and that will determine the
currency required to secure the chosen investment. |
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| As an example, if the bond markets
are providing a great return in America, overseas investors will have to
buy US Dollars in order to buy those bonds. Hence, the US Dollar will strengthen. |
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| But the key, as far as these investors
are concerned, is in getting your funds there ‘first’ because, once
the markets know about the advantage, everyone moves their funds there,
moving the exchange rate and diminishing the currency advantage in the
investment. Being the first really means anticipating the data and this
is where the adage that traders ‘Buy the rumour and sell the fact’
comes into play. |
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| Rumours within the market of a change
in interest rates or weak or strong economic data will almost never be
reported in the press or on the internet. |
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| However, these rumours are exactly
what international investors will use to decide where to move their funds
around the globe. |
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| The result is that by the time the
press has the news, the market has already moved and the announcement of
the actual data or interest rate decision will often produce the opposite
effect to the expected one. |
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| This is because those who would
trade on this news have already done so in anticipation of the announcement
and once they have seen the result of their trade, they take profit, reversing
their original transaction. |
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| On the contrary |
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| Many clients are initially surprised
by this contrarian reaction to positive or negative data but it is a characteristic
of the market and something that traders, even those looking after private
property investors, can and do use to their clients’ advantage. |
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| At the time of writing, the Bank
of England is meeting to determine UK interest rates. The expectation was
that, with so much negative economic news from the UK, the monetary policy
Committee’s 9 members would vote unanimously for a cut of 0.25% in the
UK base rate to stimulate consumer consumption – the driving force of the
economy. |
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| However, retail sales haven’t shrunk
as many expected they would after the 7th July bombings. |
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| In fact retail activity is still
relatively buoyant and certainly compares well with Europe and the US.
Consequently, even though inflation is topping the BOE’s target rate to
2.0%, they may well stay their hand until they have
another month’s worth of post 7th July data before acting. |
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| This rumour
has allowed the Pound to rally, pushing the US Dollar above $1.7800 briefly.
Should the BOE leave interest rates alone on 4th August, Sterling might
just rally harder and more convincingly. |
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| However, because
traders are waiting for what they perceive to be good news, anything negative
will create an instant sterling fall of a cent or so as profits are taken
and pounds are sold. |
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| Knowing the
facts may save some from the general rigours of the forex market but knowing
the speculation, will protect and save you from the worst that the market
has to hurl at you. The use of a specialist currency Dealer will ensure
you have an ally in the market who will make sure you know as much as he/she
does; saving you time, money and hassle. |
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