Profiting With Forex (PFX) Commentary and Analysis
by John Jagerson
As forex traders we spend a lot of time analyzing yields from the perspective of the primary central bank rates. However, I think a lot of traders are neglecting a source of daily information about yields. In this case, I am referring to relative yields or the performance of two economies' stock markets. This is independently verifiable information that doesn't lag and has an indirect but influential relationship on a currency pair, which can create nice trading opportunities.
The chart below shows the S&P 500 (candles) and its relative strength compared to an index of European stocks. You can see the breakdown on the relative strength line on 8/22, which coincided with the start of a devaluation of the USD. Recently the US stock market has been performing reasonably well and the RS line has been uptrending, which helps explain some of the choppiness in the EUR/USD.
One of the ways that I use this is as a component of an overall fundamental score. It helps contribute to a complete picture of one currency's strength compared to another. From a day to day basis, I may trigger a trade as the relative strength line breaks a previous support or resistance level. A great example is the break on 9/21, which I used to help justify holding a long EUR/USD position. Currently, the relative strength line is back to this same resistance level and beginning to bounce back down. This could be a signal that the correction on the EUR/USD is over and we are headed back up.
We track the relative strength of the major stock markets and smooth the data a little so it can be used as a component of a comprehensive fundamental score (See our site). It is not a surprise that the NZD ranks the best on that scale.
S&P RS Graph Source: MetaStock Pro FX
10/22/2007 by John Jagerson
The forex is buzzing with comments about the change in the risk environment. The JPY is strengthening against just about everything, stocks are down again following Friday's rout and the USD retraced last weeks losses against the EUR and GBP. However, if the risk environment was really changing, I would expect bond prices to be rising and yields to be falling. So far, this session, the bond yields would dispute this situation.
The 10-year yield is rising, which means bonds are falling. This is not only contrary to the assumed risk bias out there but is against the movement in equities as well. This contrarian movement may indicate that the big correction on the USD is over temporarily. It is also interesting that several of the major pairs have paused at relevant support/resistance levels. I certainly don't think that more adjustments are impossible but it does not appear that we are due for another correction like we saw in late July and August.
TNX Source: MetaStock Pro FX
There are a thousand IBs (Introducing Brokers) out there that will be crying themselves to sleep tonight on their money-filled pillows. The NFA has just released a new rule that will prevent many current IBs from continuing their business.
An IB basically introduces a forex account holder to a dealer (in most cases an FCM) and in return collects a rebate on every lot that account trades. Some IBs actually work as a broker and provide a service to their account holders but in the forex it is all too common for IBs to essentially acquire the account and then abandon them to the dealer. If you signed up for your original forex account because of a workshop or seminar product (admit it, a lot of people did) then chances are you were introduced to your dealer by an IB and the company you met is still being paid a commission on your trades.
This new rule only applies to most unregistered IBs. While not all of these companies or individuals are slimy there are enough of them to cause serious problems. Often the inducement to sign up for an account is to get access to a suspect system, software or special "advice." As a member of the advisor industry (we run a registered CTA) I am excited to see the change as it will clear out a lot of the riff raff. Here is some of the actual verbiage from the announcement.
Effective immediately, no Member subject to Compliance Rule 2-39(b) may accept orders or accounts for new retail off-exchange forex customers from unregulated entities. Firms that are currently accepting orders or servicing accounts introduced by unregulated entities have until October 31, 2007 to unwind their arrangements with these unregulated entities. These firms should contact NFA staff as soon as possible.
So how does this affect you? It changes the competitive environment amongst the dealers. If they no longer have to pay large premiums to attract IBs, that really don't provide a lot of value, then it will increase their margins. Now that may not sound good for you yet but in fact, because this is happening industry-wide, it will increase competition and those savings are likely to be passed down to us traders in the form of tighter spreads.
Overall this is a good thing because the industry needs some additional oversight to keep out the fly-by-night operations and make more room for service providers that actually have value to share. I think this is particularly valuable for new account holders who are just entering the market for the first time. Registered IBs are subject to a lot more scrutiny and have a lot more to lose if they mistreat or ignore their customers.
This is on the heels of the NFA announcing more stringent regs on the dealers themselves.
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Hi, welcome to the Profiting With Forex (PFX) commentary and analysis.
We are John Jagerson and S. Wade Hansen, authors of Profiting With Forex, a McGraw Hill publication.
We have years of experience trading the forex, as well as years of experience trading forex options. We'll talk a lot about those in our posts.
We write daily forex commentary and analysis, which we will post here. We also produce fundamental and technical analysis videos and commentaries.
Looking forward to hearing from all you.