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Forex Q&A with Ed Ponsi
Greetings from Mexico City! It seems that last week's article struck a nerve, thank you for all of your responses. To update the situation, this weekend's meeting in Saudi Arabia turned out to be little more than a dog and pony show, and a slight production increase of 200,000 barrels per day did nothing to alleviate soaring energy costs. An increase in supply had been widely anticipated, and many consider 200,000 bpd to be less than adequate. Saudi Arabia's King Abdullah disappointed the gathering by blaming speculators for the rally to nearly $140 per barrel, as if there had been no speculators trading oil when prices fell below $20. Britain's Prime Minister Gordon Brown offered a more accurate view, noting that the real problem is "oil demand rising faster than supply." American energy secretary Samuel W. Bodman put it bluntly in a meeting with reporters, saying, "There is no evidence we can find that speculators are driving futures prices." If anything, the meeting made it clear that no real steps will be taken to ease the pain.
I have some great questions from readers to share with you – one of them dealing with last week's article on the relationship between oil and the U.S. Dollar, another about trading at odd hours. If I didn't get to your question this week, don't worry, I have so many good questions that I'll still be answering them next week. Let's get to it!
Q) Thanks for your informative article, but I'd like to ask, why have the oil producing countries been reluctant to switch from the dollar as the trading currency despite this loss of value to a more stable currency like the euro? Also some countries including China have been threatening for quite some time now to scale their USD holdings to euro, but they are not doing it. What's the big deal? If they did this the dollar would greatly appreciate.
Ed Ponsi) Thank you for your question. Actually, if China and the oil producing countries move away from the USD, this would accelerate the U.S. currency's decline. Imagine that you own tens of millions of shares of a stock that just keeps declining in value. You want to sell your shares, but you are concerned because if you begin to sell in large quantity, you will drive the price lower due to the size of your position. Also, if the market catches wind that a large seller is dumping shares, other traders will sell their shares, possibly causing the stock to collapse.
This is similar to the situation that many countries now find themselves in regarding the greenback. Many of the oil producing countries are flush with U.S. Dollars, which the U.S. has sent to them in return for their oil. China holds over 1.3 trillion dollars worth of foreign reserves, most of it in U.S. Dollar denominated assets. These countries dislike the fact that the USD keeps falling, but they are caught between a rock and a hard place – if they sell in meaningful quantity, they will depress the dollar even further, and lower the value of their holdings. Also, many of the Middle Eastern currencies, such as the Saudi Riyal, the United Arab Emirates Dirham, and the Jordanian Dinar, are pegged to or closely mimic the U.S. Dollar. So if panic selling occurs in the U.S. Dollar, these currencies will suffer as well.
In fact, while the Saudis have made it a point not to emphasize the weakness of the U.S. currency, other world leaders less friendly to the U.S. are laughing with glee at the demise of the dollar. The only OPEC countries that have officially endorsed moving away from accepting U.S. Dollars in exchange for oil are Venezuela and Iran – not exactly good friends of the United States. Iran's Ahmadinejad, who in the past has called the dollar a "worthless piece of paper," and Venezuela's Chavez want to dump the USD in part because it would injure the currency further, thus damaging the prestige and power of the U.S. If that is not a reason for the United States to protect the value of its currency, I don't know what is.
Q) Hi Ed, thanks for the great insights. Question regarding timing - are there better times of the day to trade certain pairs? For example GBP/JPY appears to have tremendous moves starting at 3:30 am eastern time, hard for some of us to keep up at that hour. So are there better pairs to trade after dinner time on the east coast between 7 pm & 11 pm eastern time. I say evening because I am not a full time trader yet, still need to pay the bills with a day job. Your guidance is greatly appreciated.
Ed Ponsi) Thank you for your email. The reason why you are seeing big moves in the Great Britain Pound – Japanese Yen currency pair (symbol GBP/JPY) at that hour is because when it is 3:30 am in New York, it is 8:30 am in London. London is the world's capital of Forex trading, accounting for approximately 30% of all trading volume, and when those big traders wake up and start throwing their weight around, the market responds with volatility. Also, U.K economic indicators are often released at that time of day, adding to the overall climate of high volume and volatility.
Here's a recent example; on June 19, 2008, U.K. Retail Sales figures were released for the month of May. The record monthly increase in sales of 3.5% was far above the estimate of -0.1%, and the Pound rocketed higher against a variety of currencies, including the Japanese Yen, as a result. Please note that this chart is notated in Greenwich Mean Time, which is currently four hours ahead of New York time – meaning that the move occurs at about 4:30 am Eastern time. GMT is used frequently by Forex traders because of the international nature of the currency markets (see figure 1).
Figure 1: GBP/JPY blasts higher on the 15-minute chart due to Retail Sales report. Source: Saxo Bank
Does this mean that we have to get up at 4:00 am to trade Forex? No, but some people do. I used to get up very early to trade, but I think I've found a better way. Instead of focusing on time of day, I focus on price – every trade I place has a specific entry price, protective stop price, and at least one specific exit price. Since the trades are based on price and not time, I really don't care what time of day they execute – the only thing that matters to me is that I get the price that I want.
Many currency pairs are active during the Asian session, which begins around 6 to 7 pm Eastern time. For those who live on the U.S. East Coast and work normal hours, this is an excellent time of day to trade Forex. The main Japanese Yen pairs (USD/JPY, EUR/JPY, GBP/JPY) tend to be very active at this time of day, as well as major pairs such as EUR/USD and GBP/USD. The Australian Dollar and New Zealand Dollar pairs also enjoy an increase in activity. The action tends to fade after midnight Eastern (New York) time, and things get quiet until – you guessed it – around 3:00 am Eastern time, when European and U.K. traders get back in the game. 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 