Actually I do have a question in reference to your post above…
This is actually a really good information about Cuba. So, what is this means a long term buying investment? Are you referring to the USD or other types of investment outside of Foreign Exchange (Currency)?
[QUOTE=“Isabella24;672698”]
Actually I do have a question in reference to your post above…
This is actually a really good information about Cuba. So, what is this means a long term buying investment? Are you referring to the USD or other types of investment outside of Foreign Exchange (Currency)?[/QUOTE]
Right, this would be outside of the forex market. If Cubas currency (Cuban Peso) was a freely floating exchange, then it would be a good trade to long it as it would appreciate due to US dollars pouring into the country, however it is not freely floated so there is no opportunity there. I’m talking more along the lines of purchasing equity in companies doing business in Cuba, and Cuban industries that would benefit from the embargo being lifted.
An example company is Sherrit International, the largest independent energy producer in Cuba, rose 20% this morning alone before Obamas announcement. Diversifying into a dozen similar companies over next year should yield a pretty solid return over the benchmark indices.
Nice. This is great. Another way on how to invest in companies. There is always other ways on how to make money not just trading currencies 
It’s like thinking " outside" of the box.
I will think of something and I will post it here in the thread. Thank you and Keep it up!
Alright. My weekly goal for this myfxbook is 5%… And I hit that plus a little more this week, although had a bit of a dollar coaster ride during the middle of the week going from 0% to 14% back to 0%. The lack of volatility following the FOMC was a bit surprising and burned me a bit. Next week will be doubtful to hit 5% due to Christmas but we will see.
I already mentioned this pair earlier in this thread, but eurchf is still a great long trade for the ultra patient. The SNBannounced this week that they will be cutting rates to under 0% next month, a move which many are saying is a front running move to the ECB initiating QE next month as well. I also really like a short euraud position right now too. The market is awash in liquidity right now and the Aussie is a logical stop for yield hunters, I expect to see this correct down to 1.45 within the next month (currently at 1.50).
Merry Christmas to you Global!
I see you have your myfxbook up and running… thats awesome.!Good for you.
What a great way to start for a New Year. I will be back trading in a few weeks. I might need some help to get back in again with a little refresher 
[QUOTE=“PipNRoll;673264”]Merry Christmas to you Global!
I see you have your myfxbook up and running… thats awesome.!Good for you.
What a great way to start for a New Year. I will be back trading in a few weeks. I might need some help to get back in again with a little refresher ;)[/QUOTE]
Merry Christmas! Nothing like a new year to get motivated for better trades
Merry Christmas to you all!
Audusd is in a decent place to long. With nearly all of the major central banks easing policy or already in easy policy, the higher yielding aussie should stand to gain. Right now the pair looks overextended, especially on the daily where the RSI is well below the 30 line. We are coming up to the huge support line around .8075. This would be a great long entry, and I will enter there. Alternatively, a nice bearish trendline is in place on the hourly chart, watch for the trend break pattern in the chart below for another signal to enter long.
“The market prices news events and data entirely before the events occur, therefore there is no need to pay attention to news and data!”
True or false?
Hmmm …thought provoking… sometimes a visual aid helps me in these types of questions.
So everyone knows the good old S&P, and earlier this month lots of talk was that all the good news has been “priced in”.
Then along came a news event.
The S&P this month:-
Great example Peterma. So the answer to the question posed in my previous post is an unequivocal “FALSE!”.
Here is another example from last June of the NZDUSD during one of their interest rate decisions.
This particular rate hike was the second or third hike in a row for the New Zealand Central Bank, and it was expected by around 90% of economists surveyed a week before the announcement. This was about as closest to a “sure thing” as news announcements come. Accordingly we saw the nzdusd being bought about 5 days before the interest rate decision, leading to about 140 pips in gains.
This “pricing in period” would seem to back up the theory that all news is entirely priced in before its release… But look what comes next.
Immediately after the expected rate hike is announced, kiwi spikes upwards by around 100 pips! If this news had been entirely priced in beforehand, this spike would never have occurred. Why would it have if it was entirely priced in before hand?
Not only is there a huge spike AFTER the announcement, residual buying due to the announcement is clearly seen for an entire month following the news. The affects were only ended after the RBNZ released a statement saying the the kiwi was too overvalued and that they would intervene in the currency market to de-value it.
That statement (another news event) resulted in a spike down, followed by a 1000 pip drop on residual effects.
So in summary, the market will price in sentiment of big scheduled news events, such as interest rate announcements, before they are actually released. HOWEVER, as seen by the above example, there will nearly always be some sort of big spike in price follow the announcement (proof that it wasn’t entirely priced in) and there is very frequently a lasting after-effect seen in the price following the big news event.
“News is already priced in the current price so there is no need to follow the news”
False and damaging philosophy that will reduce your potential profit as a forex trader by a HUGE degree.
An old timer in the market was asked about the above often - seen price behaviour, where there is almost universal expectancy of an imminent major news event, where many analysts are saying that price has already reflected this expectancy (i.e. the upcoming announcement/news is already priced in) and yet post announcement price reacts as was expected.
His answer was simple, pre the announcement expectancy is priced in, post the announcement certainty is being priced in.
Global’s example shows this very much in action.
[QUOTE=“peterma;674095”]An old timer in the market was asked about the above often - seen price behaviour, where there is almost universal expectancy of an imminent major news event, where many analysts are saying that price has already reflected this expectancy (i.e. the upcoming announcement/news is already priced in) and yet post announcement price reacts as was expected.
His answer was simple, pre the announcement expectancy is priced in, post the announcement certainty is being priced in.
Global’s example shows this very much in action.[/QUOTE]
Exactly. The pre-news “pricing in period” is reflecting the “sentiment” of the release. It’s a derivative of the direction that the news event is predicted to go and the degree of confidence that is behind that prediction. But there is always uncertainty regarding every release, therefore its rarely entirely priced in. The above example had a huge degree (90% of economists forecasted the rate increase) of confidence behind the outcome, yet the market only priced a third of the move up by the day of the interest rate announcement.
There are many instances where the central bank doesn’t fulfill the markets expectations or does the opposite. When that occurs we see a violent market reaction where the pre-news anticipatory flows get reversed and then the “certainty flows” as you called it, take hold as the market re-adjusts expectations. These days are huge profit days for traders prepared for and following the news.
Some types of news are more disposed to creating longer affects on the market after their release then others. The ones with the longest residual affects are interest rate announcements, central bankers statements on future monetary policy, and central banks release of future inflation, GDP, and employment forecasts.
[QUOTE=“GlobalMacro;673609”]Audusd is in a decent place to long. With nearly all of the major central banks easing policy or already in easy policy, the higher yielding aussie should stand to gain. Right now the pair looks overextended, especially on the daily where the RSI is well below the 30 line. We are coming up to the huge support line around .8075. This would be a great long entry, and I will enter there. Alternatively, a nice bearish trendline is in place on the hourly chart, watch for the trend break pattern in the chart below for another signal to enter long.
<img src=“301 Moved Permanently”/>
<img src=“301 Moved Permanently”/>
http://www.myfxbook.com/members/Banker/4-quarters/1100451[/QUOTE]
Aussie has broken the trend line on the hourly timeframe that I pointed out in the above post… Looking like a bottom is forming and a long bias is in order… A target of .8245 would make sense.
Anyone know what the theory of purchasing power parity (PPP) is and how we can use this in forex trading? I can add to the discussion if someone wants to take a stab at it.
I am not familiar with PPP but here is what I have read online and how I understand it.
Purchasing Power Parity or PPP is an economic theory that implies that the international currency rates should be balanced according to the relative cost of goods and services in the given countries. For example, if the basket of goods costs $1,000 in country X and the same basket of goods costs $2,000 in country Y then the PPP relation is 1:2, which means that the currency of country X should appreciate by 100% relatively to the currency of country Y. Ideally if their current exchange rate (X/Y) is 1:2, it should become 2:2
Knowing the GDP (PPP) for each currency pair such as EUR/USD it will help to determine if the currency is overvalued or undervalued. PPP can be used as an indicator and as a main currency rate forecast. Although, it is not perfect and it has a lot of flaws in calculation and its interpretation along with many factors that will influence the currency pairs to shift the trend in short-term trading opportunities such as supply and demand, interest rates, political stability, etc. Despite of this, PPP can be used as part of a long-term fundamental indicators to predict the future currency rates in 1-2 or more years.
Interactive currency-comparison tool: The Big Mac index | The Economist
Big Mac Index - Wikipedia, the free encyclopedia [I]
“seeks to make exchange-rate theory a bit more [B]digestible[/B]”.[/I]
[QUOTE=“PipNRoll;674542”]
I am not familiar with PPP but here is what I have read online and how I understand it.
Purchasing Power Parity or PPP is an economic theory that implies that the international currency rates should be balanced according to the relative cost of goods and services in the given countries. For example, if the basket of goods costs $1,000 in country X and the same basket of goods costs $2,000 in country Y then the PPP relation is 1:2, which means that the currency of country X should appreciate by 100% relatively to the currency of country Y. Ideally if their current exchange rate (X/Y) is 1:2, it should become 2:2
Knowing the GDP (PPP) for each currency pair such as EUR/USD it will help to determine if the currency is overvalued or undervalued. PPP can be used as an indicator and as a main currency rate forecast. Although, it is not perfect and it has a lot of flaws in calculation and its interpretation along with many factors that will influence the currency pairs to shift the trend in short-term trading opportunities such as supply and demand, interest rates, political stability, etc. Despite of this, PPP can be used as part of a long-term fundamental indicators to predict the future currency rates in 1-2 or more years.[/QUOTE]
Yep! So that’s what PPP is… Essentially it can be thought of as the PRACTICAL exchange rate for each country. If the real exchange rate skews too far from what the PPP is, then import and export companies can and actually do begin arbitraging the discrepancy and in doing so will actually drive the exchange rate back to the PPP value.
When the real exchange rate differs from the PPP implied exchange rate by a significant margin, it can offer a big opportunity for a trade in the direction to close the gap in between the two.
A perfect example of this is the audusd. The PPP implied exchange rate for these two currencies back six months ago was around 0.7500 while the real exchange rate was around 0.9000. That is a pretty significant difference, and since then the exchange rate has dropped around a thousand pips as the exchange rate converges with the suggested PPP value.
Its important to note that the real exchange rate can sustain a significant difference to the PPP value for a long time as other market forces take the driver seat. In the case of the Australian dollar, the mining boom over there and the surge in commodity prices over the last decade has supported their dollar to a level “above its fundamental value” according to Australia’s central bank. Now with the mining boom fading and commodity prices falling, the support is no longer there and the Aussie dollar has begun falling (nearly a thousand pips in the last 6 months). As this occurs the PPP value can be used as a target for where the real exchange rate will want to end up, currently the audusd PPP value is 0.7200.
Usually large differences in the PPP value and the real exchange rate are built during periods of calm markets i.e. positive risk sentiment, and these big differences typically converge and shrink during periods of market unease. A big indication of market unease, and therefore a sign that the PPP value and the real exchange rate are going to begin to converge, is an increase in market volatility. This can be gauged with the VIX fear index and also the daily ATR indicator on various forex pairs. As volatility increase, the real exchange rate tends to correct back towards the PPP value.
So where can you find the PPP values?
There are various models in use for calculating the value, a few big institutional investment banks have their own proprietary models and central banks have their own consisting of different baskets of goods depending on what they consider is important to their respective policies.
[QUOTE=“d-pip;674571”]Interactive currency-comparison tool: The Big Mac index | The Economist
Big Mac Index - Wikipedia, the free encyclopedia
“seeks to make exchange-rate theory a bit more digestible”. ;)[/QUOTE]
The links Dpip posted are a good illustration of a type of PPP model (the basket of goods are all inclusive in the price of a Big Mac, therefore the price of a single Big Mac in different countries can be compared to come up with a PPP value) and is helpful in understanding the concept. However, the Big Mac index isn’t robust or precise enough of a PPP model to help us too much in trading.
The most used independent PPP model, and the one most useful to us retail forex traders can be found in the link below:
Monthly comparative price levels
It is updated monthly and is quite a robust model that gives an accurate and useable value. According to this model, the following are the implied exchange rates for some of the more common pairs:
Eurusd should be around 0.90 (the model provides PPP values for the individual European countries which I roughly averaged to get the combined Euro value).
Audusd should be at 0.7200
Nzdusd should be at 0.8100
Gbpusd should be at 0.800
Usdjpy should be at 105.00
Usdcad should be at 115.00
Conclusions…? The real exchange rates of Nzdusd and usdcad are pretty close to their PPP values and there wouldn’t be much trading opportunity suggested here in regards to PPP.
Eurusd is way above its PPP value right now, even after the last 6 months of down trend. This suggests further downside is very likely, especially with the ECB likely to initiate QE and the Feds raising rates next year. Eurusd reaching 1.00 over the next two years seems likely.
Gbpusd is even further above its PPP value then the eurusd is. I expect gbp to also decline, but it should be more supported then the eurusd as its monetary policy will be less accommodative.
Usdjpy is significantly higher then its PPP value, this is due entirely to Abenomics and the actions taken by the Bank of Japan to directly devalue the yen. This will be the main market driver for the pair and I would not try trading the pair back to its PPP value for the foreseeable future. A financial crisis or a change in direction in Japan’s monetary policy would be green light to short the pair with the PPP target in mind, but those scenarios aren’t on the radar at the moment.
Audusd is still significantly above its PPP value, and also above the Australians central banks assessment of where the currency should be at (they recently assessed .7500). With the mining investment fading and commodity prices falling, nearly everything is conducive to the pair falling further. Currently, the pair may be due for a corrective move to .8250 maybe even to .8350 but should be a good short opportunity up there.
The Nikkei 225 has formed a double top due to what appears to be risk aversion stemming from euro concerns and maybe oil plummeting. Serious bullish implications for yen, meaning most jpy pairs should be seeing bearish moves this week. I am expecting to see usdjpy go down to test 119.00 maybe 118.80 over the next few sessions.
