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Forex Q&A with Ed Ponsi
Greetings from high above the Pacific Ocean! I'm on the flight home after two wonderful weeks in Singapore. One of the highlights of the trip was Friday's two and a half hour appearance on CNBC Asia's Squawk Box, where I charted currencies, stocks, commodities and indexes live on the air in response to viewer emails. I also met with interesting people like the CEO of the Stock Exchange of Thailand (SET), who told me that he believes his exchange has the most potential of any in Asia. Mr. Pakorn Malakul Na Ayudhya said the SET has been held back by years of political instability, but now that Thailand is under the rule of a business-friendly elected government, he expects investors to become bullish on the country. I guess only time will tell if his prediction will come true.
While I've been here in Singapore a few of you have sent in some interesting questions, so let's begin…
Q) Hi Ed, I am regular reader of your articles and I found them very informative. I'd like to ask you about the relationship between JPY crosses. I've found many times these crosses moving in tandem with USD/JPY and even against the movement of their corresponding currency but sometimes suddenly they leave USD/JPY and follow the direction of their currency. For example GBP/JPY move up with USD/JPY though GBP/USD moving down. But sometimes it follows the movement of GBP/USD. What is your explanation for that? Thank you.
Ed Ponsi) Thank you for your email and your kind comments. When trading Forex, we must keep in mind that there are two currencies in every currency pair, and the phenomenon you are experiencing is due to this fact. Sometimes a currency pair is moving due to one of the currencies, and sometimes the other. For example, if you see that USD/JPY is falling, and the GBP/JPY and EUR/JPY pairs are falling as well, we could say that this is a "JPY move." A quick glance at the time of day the movements began, coupled with a scan of the newswire for that time of day, will probably indicate some economic news or other market moving event that originated in Japan. On the other hand, if you see the GBP/JPY pair following the path of the GBP/USD and GBP/CHF currency pairs, you are looking at a "GBP move", which is probably related to some news or other event that occurred in Great Britain. Whenever any currency is on the move, check your news to find out the reason for the move; sometimes the reason is obvious, sometimes it is not, but performing this exercise can give a trader a good sense of which events will move the market, and which will not. Good luck!
Q) Edward thanks very much for your comments posted on the Online Trading Academy emails. Over the years I've read them and learned a lot from you. Do you think the current credit crisis could create a ripple effect on the real estate market, affecting other developed countries in the near future like for example Australia or New Zealand?
Ed Ponsi) There is no question that a seizure of the lending mechanism can affect banks in any part of the world, because even though most of the bad mortgage loans originated in the U.S., their reverberations have been felt everywhere. Banks lend and borrow money across international lines, not just within their own countries. Since any bank regardless of location may have been affected by these bad investments, there is a general reluctance to lend money, but it goes beyond that. Some banks are hoarding capital not because they are afraid to make loans to other banks, but because they themselves may need that capital to survive. In a case such as this, the borrower may not have any exposure to bad loans and still find it difficult to obtain capital from other banks. Fed Chairman Bernanke's actions have eased the crisis for now, but it may rear its head again in any part of the world.
Q) The fed have cut interest rates aggressively since August 2007 and pumped in a lot of money. Perhaps in the short term interest rates will fall even further. However with rising inflation can we not expect a long term trend of increasing interest rates causing the dollar to reverse its current weakness and thus strengthen? Maybe in the second half of 2008 the fed will increase rates!
Ed Ponsi) Thank you for your question. One thing I've learned as a trader is that anything can happen, so while I agree that this is possible, I encourage you to look at U.S. interest rates within the context of the rates offered by other countries. Right now, the greenback is weak despite the fact that other major central banks (specifically the Bank of England and the Bank of Canada) have also reduced their benchmark rates. The U.S. has cut rates dramatically (300 basis points so far, with more on the way this week) in comparison with Great Britain (75 basis points) and Canada (150 basis points). One of the reasons for the dramatic fall of the USD is the fact that the Fed was so aggressive in cutting rates in comparison to other countries. The Fed also added a tremendous amount of liquidity to prevent a collapse of the U.S. banking system, meaning that it pumped countless billions of dollars - created from thin air – into the marketplace.
The U.S. Federal Open Market Committee will almost certainly raise interest rates at some point, the question is will they raise rates as aggressively as other central banks? We have to view rate moves within the context of what is happening in other lands. Even if the Fed does raise rates aggressively in comparison to its peers, this does not solve the problem of too much money in the system, due to the Fed's injections of liquidity. Please keep these other factors in mind when considering the future of the U.S. Dollar.
Q) Ed, what's the best forex trading software would you recommend, if there is such a thing.
Ed Ponsi) Thank you for your question. We've all seen the commercials, featuring a guy milking his cow and then making millions in his spare time, trading Forex using a widely advertised computer program that features green and red arrows. I'd sure like to talk to that farmer now and ask him if he's still "stacking the cheese" using this system. I'm not aware of any effective currency trading software that is commercially available, especially the brands that are constantly hyped on infomercials. There certainly is a lot of money to be made trading currencies, and the idea that it can be done easily and automatically is appealing to many. This is why we see so much hype surrounding these products; they are presented as get rich quick schemes that require little effort. Unfortunately, these "black box" programs (meaning that the reason for buying and selling is not disclosed to the trader) do not adapt well to a constantly changing marketplace; they may work well in a trending market, and then get chopped to pieces when the market enters a range bound mode. These machines also cannot quickly interpret economic news and geopolitical events, which is a huge advantage enjoyed by experienced individual traders. My advice is to learn how to trade properly, and leave the software behind. Good luck!
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through 