What is the global Forex market?

What is the global Forex market?

Today, the Forex market is a nonstop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are continually and simultaneously bought and sold across local and global markets. The value of traders' investments increases or decreases based on currency movements. Foreign exchange market conditions can change at any time in response toreal-time events.

The main attractions of short-term currency trading to private investors are:24-hour trading, 5 days a week with nonstop access (24/7) to global

•Forex dealers.

An enormous liquid market, making it easy to trade m ost currencies.

•Volatile markets offering profit opportunities.

•Standard instruments for controlling risk exposure.

•The ability to profit in rising as well as falling markets.

•Leveraged trading with low margin requirements.

•Many options for zero commission trading.

The Gold exchange period and the Bretton-Woods Agreement

The Gold exchange period and the Bretton-Woods Agreement

The Bretton-Woods Agreement, established in 1944, fixed national currencies against the US dollar, and set the dollar at a rate of USD 35 per ounce of gold. In 1967, a Chicago bank refused to make a loan in pound sterling to a college professor by the name of Milton Friedman, because he had intended to use the funds to short the British currency. The bank's refusal to grant the loan was due to the Bretton-Woods Agreement.

Bretton-Woods was aimed at establishing international monetary stability by preventing money from taking flight across countries, thus curbing speculation in foreign currencies. Between 1876 and World War I, the gold exchange standard had ruled over the international economic system. Under the gold standard, currencies experienced an era of stability because they were supported by the price of gold.

However, the gold standard had a weakness in that it tended to create boom- bust economies. As an economy strengthened, it would import a great deal, running down the gold reserves required to support its currency. As a result, the money supply would diminish, interest rates would escalate and economic activity would slow to the point of recession. Ultimately, prices of commodities would hit rock bottom, thus appearing attractive to other nations, who would then sprint into a buying frenzy. In turn, this would inject the economy with gold until it increased its money supply, thus driving down interest rates and restoring wealth. Such boom-bust patterns were common throughout the era of the gold standard, until World War I temporarily discontinued trade flows and the free movement of gold.

The Bretton-Woods Agreement was founded after World War II, in order to stabilize and regulate the international Forex market. Participating countries agreed to try to maintain the value of their currency within a narrow margin against the dollar and an equivalent rate of gold. The dollar gained a premium position as a reference currency, reflecting the shift in global economic dominance from Europe to the USA. Countries were prohibited from devaluing their currencies to benefit export markets, and were only allowed to devalue their currencies by less than 10%. Post-war construction during the 1950s, however, required great volumes of Forex trading as masses of capital were needed. This had a destabilizing effect on the exchange rates established in Bretton-Woods.

In 1971, the agreement was scrapped when the US dollar ceased to be exchangeable for gold. By 1973, the forces of supply and demand were in control of the currencies of major industrialized nations, and currency now moved more freely across borders. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s. New financial instruments, market deregulation and trade liberalization emerged, further stoking growth of Forex markets.

The explosion of computer technology that began in the 1980s accelerated the pace by extending the market continuum for cross-border capital movements through Asian, European and American time zones. Transactions in foreign exchange increased rapidly from nearly $70 billion a day in the 1980s, to more than $3 trillion a day two decades later.

The explosion of the euro market

The explosion of the euro market

The rapid development of the Eurodollar market, which can be defined as US dollars deposited in banks outside the US, was a major mechanism for speeding up Forex trading. Similarly, Euro markets are those where currencies are deposited outside their country of origin. The Eurodollar market came into being in the 1950s as a result of the Soviet Union depositing US dollars earned from oil revenue outside the US, in fear of having these assets frozen by US regulators. This gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government reacted by imposing laws to restrict dollar lending to foreigners. Euro markets were particularly attractive because they had far fewer regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euro markets an advantageous place for holding excess liquidity, providing short- term loans and financing imports and exports.

London was and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market, when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London's convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euro market.

Euro-Dollar currency exchange

Euro-Dollar currency exchange

The euro to US dollar exchange rate is the price at which the world demand for US dollars equals the world supply of euros. Regardless of geographical origin, a rise in the world demand for euros leads to an appreciation of the euro.

Factors affecting the Euro to US dollar exchange rate Four factors are identified as fundamental determinants of the real euro to US dollar exchange rate: The international real interest rate differential between the Federal

•Reserve and European Central Bank Relative prices in the traded and non-traded goods sectors

•The real oil price

•The relative fiscal position of the US and Euro zone

•The nominal bilateral US dollar to euro exchange is the exchange rate that attracts the most attention. Notwithstanding the comparative importance of

bilateral trade links with the US, trade with the UK is, to some extent, more important for the euro. The following chart illustrates the EUR/USD exchange rate over time, from the inauguration of the euro, until mid 2006. Note that each line (the EUR/USD, USD/EUR) is a "mirror" image of the other, since both are reciprocal to one another. This chart is illustrates the steady (general) decline of the USD (in terms of euro) from the beginning of 2002 until the end of 2004.

EUR-USD rates 1998-2008

In the long run, the correlation between the bilateral US dollar to euro exchange rate, and different measures of the effective exchange rate of Euroland, has been rather high, especially when one looks at the effective real exchange rate. As inflation is at very similar levels in the US and the Euro area, there is no need to adjust the US dollar to euro rate for inflation differentials. However, because the Euro zone also trades intensively with countries that have relatively high inflation rates (e.g. some countries in Central and Eastern Europe, Turkey, etc.), it is more important to downplay nominal exchange rate measures by looking at relative price and cost developments.

The fall of the US dollar

The steady and orderly decline of the US dollar from early 2002 to early 2007 against the euro, sterling, Australian dollar, Canadian dollar and a few other currencies (i.e. its trade-weighted average, which is what counts for purposes of trade adjustment), remains significant. In the wake of the sub-prime mortgage crises in the US, dollar losses escalated and continued to feel the backlash. The Fed responded with several rounds of rate hikes while weighing the balance of domestic growth and inflation fears.

When was the last time the EUR-JPY pair was over 150.00? (Have a look at)

Daily Forex Outlook - US Manufacturing expands

CURRENCY TRADING SUMMARY - 3^rd November (00:30GMT)

U.S. Dollar Trading (USD) was mixed as stocks remained volatile with good data not generating substantial gains in the stock markets. October ISM Manufacturing was 55.7 vs. 53 forecast. September Pending Home Sales gained 6.1%. The Dollar hit day highs at the start of Asia as the market opened Monday on a very shaky footing. In US Stocks, DJIA +76 points closing at 9789, S&P +7 points closing at 1043 and NASDAQ +4 points closing at 2049. Looking ahead, September Factory Orders are forecast at 0.8% vs. -0.8% previously.

The Euro (EUR) tested below 1.4700 in Asia but rebounded well as stocks lifted off lows and China's PMI at 55 showed manufacturing expanded at the fastest pace in 18 months. The rally continued on similar data in the US before stocks once again came under pressure and pushed the Euro lower. EUR/JPY was especially volatile rallying from 131 to test 134 in New York. Overall the EUR/USD traded with a low of 1.4682 and a high of 1.4847 before closing at 1.4765.

The Japanese Yen (JPY) was extremely volatile with sharp selling in thin volume at the start of Asia leading to a test of low 89 Yen area before bouncing for the rest of the day. Crosses exaggerated the movement with all having 3+ Yen ranges. Overall the USDJPY traded with a low of 89.18 and a high of 90.72 before closing the day around 90.30 in the New York session. Looking ahead, Bank Holiday in Japan.

The Sterling (GBP) was pressured at the start of the European session as the market focused on propsed UK bank break up plan and potential for the BOE to expand QE by up to 50bn pounds more on Thursday. October PMI Manufacturing at 53.7 vs. 50.1 forecast. Overall the GBP/USD traded with a low of 1.6327 and a high of 1.6481 before closing the day at 1.6395 in the New York session.

The Australian Dollar (AUD) touched fresh multi-week lows at .8905 before rebounding with the improving sentiment and manufacturing PMI's around the world. The commodity currency also enjoyed gains from the bounce in Oil and Gold seen overnight. Overall the AUD/USD traded with a low of 0.8904 and a high of 0.9125 before closing the US session at 0.9040. Looking ahead, RBA Interest rate meeting forecast to raise rates to 3.5% from 3.25% previously.

Oil & Gold (XAU) bounced as the USD weakened over the day. Overall trading with a low of USD$1041 and high of USD$1063 before ending the New York session at USD$1059 an ounce. Also bounced on improved global manufacturing data. Crude Oil was up $1.13 ending the New York session at $78.13.

TECHNICAL COMMENTARY

Currency	Sup 2	Sup 1	Spot	Res 1	Res 2
EUR/USD	1.4646	1.4683	1.4770	1.4859	1.4927
USD/JPY	88.01	88.84	90.35	90.69	91.82
GBP/USD	1.6252	1.6330	1.6400	1.6604	1.6693
AUD/USD	0.8760	0.8866	0.9040	0.9218	0.9329
XAU/USD	1026.00	1035	1058.00	1067.00	1070.00
OIL/USD	75.25	76.20	78.20	78.50	80.00

Euro - 1.4770

Initial support at 1.4683 (Oct 29 low) followed by 1.4646 (Oct 6 low). Initial resistance is now located at 1.4859 (Oct 29 high) followed by 1.4927 (Oct 27 high)

Yen - 90.35

Initial support is located at 88.84 (Oct 14 low) followed by 88.01 (Oct 7 low). Initial resistance is now at 90.69 (Nov 2 high) followed by 91.82 (Oct 28 high).

Pound - 1.6400

Initial support at 1.6330 (Nov 2 low) followed by 1.6252 (Oct 26 low). Initial resistance is now at 1.6604 (Oct 29 high) followed by 1.6693 (Oct 23 high).

Australian Dollar - 0.9040

Initial support at 0.8866 (Oct 7 low) followed by the 0.8760 (Oct 6 low). Initial resistance is now at 0.9218 (Oct 27 high) followed by 0.9329 (Oct 21 high).

Gold - 1058

Initial support at 1035 (Oct 30 low) followed by 1026 (Oct 29 high). Initial resistance is now at 1067 (Oct 20 high) followed by 1070 (Oct 14 high).

Oil - 78.20

Initial support at 76.20 (Intraday Support) followed by 75.25 (Intraday support). Initial resistance is now at 78.50 (previous support) followed by 80 (Major Level).


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EU Morning Report � Asian stocks up for the first time in three days

For the first time in three days Asian stocks are higher, led by banks and mining companies on profit optimism.

• Korea Exchange Bank and Westpac Banking Corporation posted better-than-estimated earnings.� Korea Exchange Bank jumped 7% after stating third quarter profit almost tripled.� Westpac, Australia's number 2 bank, added 1.4% in Sydney.
• Australian retail sales unexpectedly dropped in September, driving down the nation's currency as traders added to bets the central bank may pause after two successive interest-rate hikes.
• The US dollar remains vulnerable to the likelihood that the Federal Reserve will repeat its commitment to keep borrowing costs at a record low for an "extended period."
• Gold jumped to a record $1088.50 an ounce in New York yesterday after India's central bank purchased 200 tons of the metal from the International Monetary Fund adding $6.7 billion to the IMF's finances.� In a press release the IMF said the deal with India represents only about half of the total amount of gold the institution intends to sell.
• Other possible buyers for the remaining quarter are either China or Russia.� Both nations have made very public moves lately to diversify their holdings in an attempt to reduce their dependency on the buck.� China's largest gold company, and Sumitomo Metal Mining, Japan's top producer, gained at least 2.9%.

Currency to watch out for: EURUSD & Gold

• The EURUSD pivot point is at 1.4670 with a preference to enter into long positions at 1.4680
• The Gold pivot point is at 1064 with a preference to enter into long positions at 1070

Today's calendar and market movers:

• US ADP Non-Farm Employment Change expected to rise to -188,000
• US Crude Oil Inventories expected to rise to 1.7 million
• US Federal Funds Rate expected to remain unchanged, followed by the FOMC Statement

Stocks:

• US stocks finished mixed with the S&P and NASDAQ up 0.2% and 0.4% respectively and the Dow off 0.2%.
• As of 07:15 GMT the Nikkei is trading at 0.42% and the Hang Seng at 1.58%

Read More... [Source: Easy-Forex - News and Reports - Posted by FreeAutoBlogger]

How to investigate your Forex Broker

The forex market is the largest market in the world, 1.9 trillion traded daily and unregulated - this last adjective is an often repeated warning, but what does it mean for you, the forex trader? When a forex broker offers guarantees on execution and account safety, can they really back this up?

The Commodity Futures Modernization Act, introduced in 2000 did not extend regulation of the CFTC to cover the spot forex market. However, The NFA offers a free database called BASIC which provides registration and membership information and shows regulatory actions brought against CFTC registrants by the CFTC, NFA or exchanges.

Here are two measures you can use to check into the background of your forex broker:

1. Check that your broker is a registered futures commission merchant. Get the brokers NFA ID and look them up at www.nfa.futures.org/basicnet/ Beware of affiliates.

2. Go to the CFTC website at www.cftc.gov/tm/tmfcm.htm and make sure that the registered FCM has substantial assets. The NFA required minimum is 250,000. However, many experts see this as a modest requirement and would like to see assets of at least 10 million.

To confirm the validity of your forex brokers price feed, cross check the trading platform feeds against eSignal and Reuters.

Slippage, (when you get a worse fill than the price you requested), and requotes (when you enter or exit the market and a different price comes up, leaving you seconds to leave the worse bid or offer) should be rare and only in fast markets. Slippage is already built into the spread

'FDIC insured' and 'segregated accounts' does not necessarily guarantee the safety of your account. Your funds would probably not receive priority in a bankruptcy as demonstrated by the Refco scandal.

Chosing a Forex Broker

Chosing a Forex Broker - What to Look For

Tight Spreads: Look for competitive spreads. This is the difference between the bid and offer and is measured in pips. This is what it will costs to enter a trade, since it is not possible to buy on the bid or sell on the offer in the Forex market.

Forex brokers are usually tied to large banks due to the large amounts of capital required for the leverage that they provide. While the forex market is unregulated, reputable brokers will be registered with the NFA.

Leverage is necessary because the price fluctuations are so small. It reflects the ratio between usable trading capital and the actual capital in your account. Some brokerages offer leverage as high as 250:1 – so in this case the broker is lending you 250 for every 1 dollar in your account.

When signing up for a forex trading account you will be required to sign a margin agreement. This states that due to the fact that you are trading with borrowed funds the brokerage has the right to interfere with your trading to protect its interests.

Managed Forex Account

Interest in the FX market has grown exponentially as the market has opened to individual investors over the last few years. Many have realized the potential for diversification and the possibility of outsized returns that were previously available only to a select few. Yet while the FX market has long been a source of income for financial institutions and high-net worth individuals, unfortunately returns on many individual investor accounts have struggled to match those of more established participants.

The FXCM Managed Accounts Program is now offering the Galaxy System Fund to address these issues. Investing in the Galaxy Fund allows you to utilize many unique advantages that the FXCM Managed Funds Program and Galaxy can provide:

1) Lower Costs: until now, fees and commissions paid by the individual investor for managed accounts in the FX market are higher than those of institutions and high-net work individuals. The Galaxy Fund leverages the 50,000+ currency trading accounts FXCM has serviced to pass along some of the best pricing available in the FX market. Moreover Galaxy Fund has low fees, with a monthly management of 0.1667% of funds under management, and a monthly performance fee of 20%.

2) Experience: FXCM has over 500 employees worldwide with traders and analysts from the world’s most recognized banks, such as UBS, JP Morgan Chase, Citibank, Goldman Sachs, Merrill Lynch, ABN Amro, and many more. The Galaxy System Fund has been selected by seasoned system trading professionals out of hundreds of systems that we have observed live.

3) Consistent Returns: While most currency trading managed funds rely on trend-following strategies, the Galaxy Fund is designed to exploit both ranging and trending markets. The system trades 5 different currency pairs across 5 different time frames, further increasing the diversification and limiting overdependence or overexposure on any one type of market condition. Moreover, the fund uses stop losses readily to limit losses. Historically, Galaxy has had modest drawdowns that are compensated by frequent months of modest positive returns and occasionally months of double digit returns. The maximum drawdowns on the backtests are small in comparison to the maximum returns.

Overnight Surprise: Understanding the Overnight Interest Calculation in Forex

By MURRAY A. RUGGIERO JR.

Article Contributed By Futures Magazine

When you trade the cash forex markets, you incur an interest profit or loss when your trades are held overnight. To develop a forex trading system that carries such trades, you need to make concessions for this interest effect in your analysis.

Two rates are involved when calculating the interest incurred by a trade: a rate for the base currency and a rate for the quote currency. If you have a pair of currencies B/Q with B being the base currency and Q being the quote currency, the following possibilities exist:

· If the trade is long B/Q, interest is charged for borrowing B with the rate determined by B’s borrowing rate. Interest is received from the lending interest for Q determined by Q’s lending rate.

· If our trade is short B/Q, then interest is received from the lending interest for B and charged the borrowing interest for Q.

In both cases, the difference between lending interest and borrowing interest or swap will be incurred. If the lending interest is greater than the borrowing interest, interest is paid to us; otherwise, we have to pay interest. To calculate the difference, both interest values must be converted into the account currency. If the account currency is the same as either the base or the quote currency, no conversion is needed for that currency.

For a particular currency, the borrowing interest rate is always higher than the lending interest rate. Interest applies if a trade is held overnight, which is considered after 5 p.m. Eastern Standard Time. We will look at some examples. In each case, the account currency is U. S. dollars.

Example 1. We enter a trade long one lot of NZD/USD on Monday and maintain the position overnight. The borrowing interest rate for NZD is 7.6%. The interest for one day is calculated at (0.076 * Since the account is maintained in U. S. dollars, this amount needs to be converted to dollars. We find an exchange rate of 0.6808 for the day in question yielding a borrowing interest of $14.18.

The lending rate for USD is 3.75%. To calculate the interest, we need to know the number of USD units equivalent to 100,000 units of NZD, which is given by the price where the trade was opened. For example, 0.6879, making the lending interest calculation (0.0375 * * Subtracting the two interest values of 7.07 – 20.82 = –13.75. Since this value is negative, we will be charged interest of $13.75

Example 2. We enter a trade short one lot of AUD/CAD on Wednesday and maintain this position after 5 p.m . The lending rate for AUD is 5.2%. The lending interest calculation is (0.052 * To convert this value into USD, we need the AUD/USD exchange rate, which is 0.7465, giving us a lending interest in dollars of $10.64.

The borrowing rate for CAD is 3.4%. To determine the number of CAD units equivalent to 100,000 units of AUD, we look to the opening price for the trade at 0.8770. The borrowing interest value is (0.034 * *

For the USD/CAD exchange rate, we find a value of 1.1644, giving a borrowing interest in dollars of $7.02. Note that since the USD is the base currency in USD/CAD, we need to divide the price by the exchange rate or multiplying by the rate of the inverse pair CAD/USD. Subtracting the interest values gives 10.64 – 7.02 = 3.62. Since this value is positive, we will be paid interest. As the trade is open after 5 p.m. on Wednesday, the calculated interest must by multiplied by 3, giving an interest payment of 3 *

Both examples show that it is necessary to know the price where the trade was opened to calculate the interest contributed by the quote currency, as this determines the number of units of the quote currency sold or bought when the trade was opened.

Example 2 shows that when the base currency and the quote currency are both different from the account currency, access to price quotes of additional pairs is necessary. To convert the lending or borrowing interest rate, we need a quote for the pair at the time of the rollover.

The bottom line is that you need to include the effects of interest rates in your historical testing. This effect can be sizable. For example, trading forex on an end-of-day basis with a 20-day channel breakout, the interest rate effect could account for a 25% adjustment in the profit or loss of a given trade.

Forex Trading Signals

Many Forex traders prefer to follow a system or receive trading signals. There are a variety of options for traders seeking this type of guidance.

Kshitij.com Forex Trading Signals, Forex Risk Management, Hedging, Currency Forecasts Consultancy Services for Forex Traders.

FXMaster.net Offers daily forex forecasting reports, SMS signals and education.

The Major Trading Sessions in the Forex Market

The FX market is active 24 hours a day - it is important for the active forex trader to identify the times where there is the most volatility and largest trading ranges.

1. Asian Session (Tokyo) 7PM-4AM EST

Tokyo is one of the principle dealing centers in Asia and is the first major Asian market to open. USD/JPY, GBP/CHF and GBP/JPY have large ranges, and offer short term traders opportunity.

2. US Session (New York) 8AM-5PM EST

New York is the second largest Forex marketplace. For active traders GBP/USD, USD/CHF, GBP/JPY and GBP/CHF are good choices, with large daily ranges.

3. European Session (London) 2AM-12PM EST

London is the most important dealing center in the world and the majority of forex trading takes place during London hours. For traders looking for volatility GBP/JPY and GBP/CHF provide large daily ranges.

4. US European Overlap Period 8AM-12PM EST

This period is the most active - the best period for day traders looking for volatility.

Leverage in the Forex Market

Leverage is necessary in the forex market because the price fluctuations are only fractions of a cent. Leverage is measured through the comparison between the capital available for trading and the capital in your account. So with a leverage ratio of 250:1 means that you have $250 worth of trading power for every 1 dollar in your account.

Exotic Carry Trade Currencies

By Dan Blystone

Introduction to the Carry Trade

The carry trade, a strategy favored among hedge funds and investment banks, is now growing in popularity among retail forex traders. A number of forex brokers are currently offer trading in exotic currencies such as the Turkish Lira (TRY) and South African Rand (ZAR) yielding strikingly high interest rates. These exotic currencies present a high risk/high reward vehicle for use in a carry trade strategy.

The carry trade is an investment strategy that involves a basic arbitrage between interest rates. In any forex transaction you are simultaneously selling one currency and buying another. In doing so, you are borrowing at one interest rate and investing at another rate. The carry trade involves selling a currency with a low interest rate, then using the proceeds to purchase a currency with a higher interest rate. If you buy the GBP/JPY pair, you are buying the British Pound and selling the Japanese Yen. You collect interest on the currency you buy and pay interest on the currency you sell.

In buying a high interest yielding currency and selling a low yielding currency you capture the interest rate differential. For example if the New Zealand Dollar has an interest rate of 8.25% and the Japanese Yen has an interest rate of 0.5%, an investor buying the NZD and selling the JPY will earn the interest rate differential of 7.75%. This return does not assume any leverage is used. At 5 times leverage the interest would yield 38.75% annually.

Between 2000 and 2007, one of the best carry trade pairs was the NZD/JPY. NZD interest rates have risen dramatically while JPY rates have remained very low. Japan's lending rate of 0.5% is the lowest among industrialized economies. The global commodities bull market and anti-inflation policies of the Reserve Bank of New Zealand have contributed the NZD’s recent historic highs.

Click here to see Figure 1: NZD/JPY Carry Trade (DealBook® 360 screen capture used by permission. © 2008 by Global Forex Trading, Ada MI USA)

The carry trade is normally used as a long term strategy, from 6 months to years, allowing the investor to weather short term market volatility.

The carry trade involves funds flowing from countries with currencies paying low interest rates to countries with high interest yielding currencies. Typically the higher yielding currencies are higher risk investments and are associated with rapidly growing economies. The ideal time to position yourself in a carry trade is at the beginning of a rate-tightening cycle in the currency you are buying.

In a time of crisis such as the terrorist attacks of 9/11/2001, investors seek safe haven currencies such as the Swiss Franc. Times of uncertainty can create an ‘anti-carry’ climate with funds moving away from higher risk currencies.

The three main funding currencies for the carry trade are the US Dollar, the Japanese Yen and the Swiss Franc. The New Zealand Dollar (NZD), Australian Dollar (AUD) and the British Pound (GBP) have been the main recipient currencies of the borrowed funds in recent years.

In the forex market interest payments are made daily based on your position. Your positions are closed out and reopened by your broker daily, a process known as ‘rolling over’. Your account is then debited or credited based on the overnight interest rate differential.

The ability to leverage your position is a key element of the carry trade. The leverage available in the forex market allows you to multiply by many times the interest rate of return. In using leverage the level of risk is also increased exponentially. There of course remains the large risk that currency market moves will erase the profits generated through the interest rate differential.

If for example a terrorist attack took place in London the GBP/JPY could easily fall by 1000 pips. The carry trade has the potential of generating a very high rate of return annually, but that gain (and possibly more) can be wiped out in a day. In order to offset risk in any one pair you can diversify carry trades among many different pairs, creating a carry trade basket.

Yen Carry Trade

The USD/JPY carry trade entered the spotlight when the Yen started trending downwards in 1995. From 1990 to 1995 the Bank of Japan had lowered the official discount rate from 6% to 0.5%., enabling low cost borrowing in the Yen. From 1995 to 1998 the USD/JPY market soared from 80 to 147 Yen per dollar.

An increase in currency volatility was an important element in the unwinding of the USD/JPY carry trade. In 1998 when massive Yen carry trades had built up, the Russian Financial Crisis and the collapse of Long Term Capital Management triggered uncertainty and volatility in the market. Hedge funds scaled back their leveraged positions and the Yen began to appreciate in value.

Click here to see Figure 2: Yen Carry Trade (DealBook® 360 screen capture used by permission. © 2008 by Global Forex Trading, Ada MI USA)

US Dollar as a Carry Trade Funding Currency

Falling US interest rates and increasing volatility in the Yen and the Swiss Franc are making the US dollar a more appealing funding currency. We may begin to see a major movement in borrowing from Yen and Swiss Francs into US dollars, adding further downward pressure to the already beleaguered US currency.

Exotic Carry Trade Currencies

Exotic carry trade currencies yielding enticingly high rates of interest include the Icelandic Krona, Brazilian Real, Turkish Lira, South African Rand, Mexican Peso and the Hungarian Forint.

The most commonly offered of these exotic currencies among retail forex brokers are the Turkish Lira, South African Rand and Mexican Peso. Below we’ll take a look at some of the fundamentals behind these high yielding emerging market currencies.

Turkish Lira (TRY)

The Turkish Lira currently offers the highest interest rate in the industrial world, with the Turkish Central Bank’s benchmark overnight rate standing at 15.25% as of this writing. One of the most popular carry trade strategies of 2007 was to go long TRY/JPY (borrowing Japanese Yen to buy Turkish Lira).

Turkey experienced significant economic gains between 2002 and 2007 in part due to increased foreign investor interest in emerging markets. The robust GDP growth rate during this period placed Turkey among the fastest growing economies in the world. International Monetary Fund (IMF) backed reforms starting in 2001 helped to improve economic stability. In January 2005, with the high inflation rates contained, the old Turkish Lira was replaced by the New Turkish Lira (dropping off six zeros). Prospective EU membership and economic reforms contributed to the rise in foreign investment. However, the Turkish economy is still has to overcome the challenges of a high current account deficit and high level of external debt. The Lira is also threatened by the possibility of political instability and the global credit crisis deterring foreign investment.

Turkey is a founding member of the OECD (Organisation for Economic Co-operation and Development) - an international organisation of thirty countries, that accept the principles of representative democracy and a free market economy. Turkey is also a member of the G20 industrial nations. The G-20 (Group of 20) is a group composed of 19 of the world's largest economies, along with the European Union.

South African Rand (ZAR)

The South African rand (ZAR), is among the world's most actively traded emerging market currencies. The Central Bank of South Africa’s overnight rate stands at 11% as of this writing. The central bank of South Africa, raised interest rates four times last year to to contain inflation and contain consumer spending. South Africa has an abundant supply of natural resources and is another economy to have benefited from the global commodities boom. However, high unemployment, inadequate infrastructure and HIV/AIDS remain challenges yet to be overcome. While economic growth has been strong in recent years, power shortages from state-owned electricity supplier (Eskom) and global economic volatility suggest that real GDP may slow in 2008. The eyes of the world will soon be on South Africa as it hosts the 2010 FIFA World Cup.

Mexican Peso (MXN)

Banco de México’s overnight rate stands at 7.5% for the Peso. Mexico has a free market economy with a Gross Domestic Product surpassing a trillion dollars measured in purchasing power parity. The world’s 13th largest economy, Mexico is an export oriented, and the biggest exporter and importer in Latin America. Oil is the largest source of foreign income. As a result of economic stability and the growth in foreign investment, the Mexican peso is now among the 15 most traded currencies in the world, and is the most traded currency in Latin America. Since the late 1990s the peso has remained stable trading at about $9 to $10 to the U.S. dollar.

While the Federal Reserve is expected to continue lowering interest rates to stimulate the U.S. economy, Mexico's central bank is expected to keeping rates unchanged creating a widening spread between the interest rates (as of this writing).

Conclusion

The daily interest payouts and massive leverage available make the carry trade a fascinating, if high risk opportunity for investors, and a compliment to purely directional trading strategies. Exotic currencies offer further diversification to a traditional basket of carry trade currencies. However, rising inflation, volatile currency markets and uncertainty resulting from the sub prime credit crisis has let to a dangerous level of instability in the markets. The international credit crisis has dampened investors' enthusiasm for riskier emerging markets. The return of an increased risk appetite among investors and diminished market volatility will set the stage for a steadier carry trade environment.

commissions in Forex Trading

Why are there no commissions in Forex Trading?

When trading stocks, futures or options an investor will use a broker who executes the trade and charge a commission for the service. Forex trading, however does not involve commissions. Forex trading firms are dealers not brokers - they assume market risk by acting as a counterparty to the trade. Forex dealers make money through the bid ask spread rather than commissions. This means that while the forex trader can never buy on the bid and sell on the offer as in other markets - and give up the spread when they enter a trade - they lose no profit to commissions in the event of a winning trade. The bid ask spread is measured in pips.

Automated Trading Systems and the Forex Market

An army of small speculators have entered the forex arena armed with pooled knowledge and sophisticated technology rivaling that of large institutions.

By Dan Blystone

As the editor of a website focused on trading and investing I try to keep track of industry related trends and the hot topics of the moment. Notably, the combination of the forex market and automated trading systems has generated a massive hive of interest online. In this article we'll cover the salient characteristics of trading systems and the forex market. We’ll also take a look at platforms offering the development, backtesting and automation of forex trading systems.

Trading systems have, of course, been around for decades. Many leading traders have long understood the virtues of using mechanical trading systems. Back in the early 1980's Richard Dennis' 'Turtle Traders' were sticking to a rigid set of rules, a mechanical trading system - the system itself a closely held secret for many years. The use of trading systems has been central to the success of many if not a majority of top performing traders.

A trading system is simply a set of specific rules, or parameters, governing entry and exit points. The technological advances of recent years have opened up a world of opportunity for the individual trader through the use of trading systems. For example, thanks to the internet and the PC, backtesting analysis of a trading system that would previously have taken months or years can be now done within minutes. Further, trading systems can now be fully automated - having the ability to both generate signals and execute trades automatically. Online communities of traders from all over the world, discussing and sharing strategies, are springing up and thriving.

The foreign exchange market is the largest and most liquid market in the world with trillions of dollars being traded daily by governments, banks, and large institutions. The volume traded in the foreign exchange market is several times greater than the total cash volume of the stocks and futures markets combined. This highly liquid, highly volatile market only relatively recently became available to the mainstream trading public. Prior to the late 1990's an investor was normally required to have millions of dollars to access the market at all. Technological advances and the advent of the internet have finally brought this market into the hands of the 'retail' trader.

In order to see why trading systems and forex have made such a compelling combination to traders, let's start out by taking a look at their respective advantages:

Advantages of Trading Systems

- A rigorously tested trading system gives the trader confidence, and a framework for discipline.
- Trading systems take the emotion out of trading. Unlike a human, an automated trading system will never second guess itself, or be misguided by fear and greed.
- Automated trading systems free you of the necessity of being in front of the markets at all times. Once an effective system is developed and optimized it can be left to run independently. Being a 24 hour market, some of the best forex trading will likely take place in the middle of the night regardless of your location. For example, if you are a trader in the US trading GBP/USD - you will likely be asleep during the volatile London open. Automated trading systems allow you to capitalize on market movement at all times. An automated system will allow you to focus on optimizing your strategy and money management rules rather than having to constantly watch the market.
- The use of automated signals and order execution allow you to trade multiple markets simultaneously rather than being glued to the movements of one market.
- Trading systems will increasingly afford faster identification of signals and reaction to them. As you might imagine, a machine will typically beat a human in the speed of identifying a trading signal and the entry of the corresponding order.

Advantages of the Forex Market

- The forex market is a true 24 hour marketplace five days a week, allowing for uninterrupted trading.
- The market is massively liquid: under normal conditions there is no problem entering or exiting a trade.
- There are no commissions, only spreads.
- There is no fixed lot size allowing a great deal of flexibility in your position sizing.
- The scope of the market is so vast that it is impossible to for any entity to manipulate it for an extended period.
- Forex dealers typically offer a great deal of leverage, sometimes as high as 400:1. Bear in mind this can work against you also if misused, and is probably the single factor contributing most to the failure of novice fx traders.
- Short Selling. Unlike the equity market, there is no restriction on short selling in forex.
- The market is highly volatile, creating many trading opportunities night and day.

Components of a Trading System

In developing a trading system the following basic components need to be considered:

- Market and timeframe.
- Entry. The trigger that initiates your buy or sell signal.
- Stop Loss. The level at which you will cut your losses in the event of the trade going against you.
- Profit Target. The level at which you will exit the trade to take profits.

To give you an idea of what a basic system might consist of here’s an example:

- Market and timeframe: EUR/USD, Daily.
- Entry: Buy entry occurs when the 50-day moving average crosses above the 200-day moving average. Sell entry signal occurs when the 50-day moving average crosses below the 200-day moving average.
- Stop Loss: Set at 50 pips from the entry.
- Profit Target: Set at 200 pips from the entry.

An oscillator such as RSI (Relative Strength Index) could be used as a filter - so that you only enter a long trade when the RSI indicates oversold conditions and a short trade when the RSI indicates overbought conditions. The conventional wisdom holds that fewer parameters or 'rules' are better in developing trading systems.

A system like this can be programmed to auto-execute in a trading platform. Alternatively, the system could be 'semi-automated' whereby you are alerted when the entry trigger occurs, and oversee the placement of the trade yourself. Alerts can be audible through your computer, sent to your email or even sent as a message to your cell phone. The semi-automated system clearly carries less risk, with you being there in person to 'pilot' the system and execute the trades manually. A fully automated system should be rigorously tested both in a simulated and live environment.

Now let's take a look at some of the Trading Plaforms that are making the automated trading of the forex market possible:

MetaTrader is a forex trading platform built by MetaQuotes. The MetaTrader platform has a built in programming language called MQL4 (MetaQuotes Language 4) that allows the user to create and backtest trading strategies using historical data. MQL4 is used to write Expert Advisors, mechanical trading systems which can be used for both trading alerts and automated trading. Custom Indicators are indicators created by you or by other MetaTrader users in addition to the suite of built in technical indicators. MQL4 is easy to learn and understand even for those with limited programming experience. MetaTrader has a large and active user community online, discussing strategies and helping eachother with programming issues. The MetaTrader platform can be used with a variety of different forex brokers.

TradeStation has been a pioneer in trading systems development, backtesting and automation. Tradestation 8.3 allows you to design and backtest forex trading strategies using their EasyLanguage® technology. Forex trading strategies can be fully automated through their platform. TradeStation also offers automated trading of the stocks and futures markets. The TradeStation platform is now incorporated with a brokerage firm, TradeStation Securities.

Strategy Runner is another innovator in the world of automated trading systems, offering fully automated trading with high-quality execution of trading strategies using a server-based solution. Strategy Runner hosts and executes your strategies for you on secure servers located in the broker's facilities, ensuring that technical problems on your computer will not interrupt trading. The platform allows you adjust or manually override your strategies at any time. Strategy Runner also offers the Strategy Exchange, a marketplace of automated trading strategies developed by industry professionals. The Strategy Exchange allows individual investors to select and build their own automatic systems portfolios and then auto-execute them via Strategy Runner.

Educational Resources

Among the hundreds of forex trading websites, I think there are three that really stand out. These sites offer excellent free educational resources, provide in depth coverage of forex trading systems and host active communities. They are: FXStreet.com, ForexFactory.com, BabyPips.com.

Conclusion

Both the forex market and trading systems are here to stay and have a long evolution ahead. The future outlook is bright for the speculator - increased fx market regulation, tighter spreads, better execution and constant innovation and improvement in trading systems technology.

Trading Forex News Releases

Due to the frequent number of releases of economic data globally there are many opportunities to trade news releases in the forex market. US economic indicators have the largest impact on the market, and the most important figures are normally released between 8:30 and 10:30 EST. The most influential US data for the forex market are dispursed through the Employment Report, (including Non-Farm Payrolls) and Interest Rates (FOMC Rate Decisions). These figures normally create a high degree of volatility in the market, sometime creating trading ranges of over 100 pips and significant opportunites for traders.

Carry Trade, Definition

The carry trade strategy is based on buying a high interest yielding currency and selling a low yielding currency. This allows the trader to earn the difference in the interest rates between the two currencies, referred to as the interest rate differential.

The differences between interest rates of countries is what creates this opportunity. Countries who are experiencing economic growth will offer higher rates of interest. However, with the higher interest rates comes risk - there is no guarantee that the country's economy will be able to pay the interest on it's currency.

For example if the Japanese Yen offers an interest rate of 0.25% and the New Zealand dollar offers an interest rate of 6.25%, some one selling the Yen and buying the New Zealand dollar can earn a profit of 6% as long as the exchange rate between the New Zealand dollar and yen remain unchanged.

Some speculators hedge the exchange rate exposure - aiming only to capture the interest rate differential. This return can be increased through leverage. The Yen and the Swiss Franc have been the main funding currencies due to their low interest rates.

George Soros

George Soros is chairman of Soros Fund Management and the Open Society Institute. He is famous for being a massively successful speculator and left wing political activist. During his time at the Quantum Fund, he earned the sobriquet ofthe man who broke the Bank of England - following his winning $10 billion speculative position short selling the British Pound. He made $1 billion on the trade and demonstrated the vulnerability of central banks.

He was born in Hungary in 1930, and having survived the Nazi occupation of Budapest, moved to London in 1947. Soros later graduated from the London School of Economics, where he was influenced by the work of Karl Popper. In 1956 he moved to the United States and founded an international investment fund.

Asian Currency Crisis

A financial crisis that started in July 1997 in Thailand, and affected currencies, stock markets, and other asset prices of several Asian countries, many part of the East Asian Tigers. The Thailand Baht was devalued by as much as 48%, dropping to close to a 100% fall by New Year of 1998. The Indonesian Rupiah was the hardest hit, falling 228% from its previous high of 12.950 to the fixed US Dollar. The Japanese Yen fell about 23% from its high to its low against the US Dollar in 1997 and 1998.

Plaza Accord

Methods of regulating the foreign exchange market - such as fixing currency values to a commodity such as gold, or setting maximum exchange rate fluctuations had proven to too rigid. After the regulatory mechanisms- such as the gold standard, theBretton Woods Accord and the Smithsonian Agreement - were no longer in place, the currency market was left with only the forces of supply and demand to guide it. Economic events such as OPEC oil crises, stagflation during the 1970's and severe changes in the US Federal Reserve's fiscal policy gave rise to a need for regulation.

These conditions led to the Plaza Accord, where on September 22nd 1985, finance ministers and central bank governors from the then G-5 nations- the United States, Japan, West Germany, France and the UK- gathered at the Plaza hotel in New York.

In 1985 inflation was low and growth was rapid. Low inflation allowed for low interest rates- however there was a threat of protectionist tarrifs entering the economy. The US was experiencing a large and growing trade deficit, caused in part by the rising dollar. Japan and Germany were facing large and growing surpluses. This imbalance threatened to upset the foreign exchange market. The 80% appreciation in value of the US dollar against the currencies of its major trading partners was seen as the source of the problems. A US dollar with a lower valuation would help stabilize the global economy- creating a balance between the exporting and importing capabilities of all countries. Devaluing the dollar made US exports cheaper for its trading partners, which caused other countries to buy more American-made goods and services.

The US persuaded the leaders to coordinate a multilateral intervention, designed to allow for a controlled decline of the dollar and the appreciation of the main antidollar currencies. Each country agreed to make changes in it's economic policies and to intervene in currency markets as necessary to bring down the value of the dollar.

The US agreed to cut the federal deficit and to lower interest rates. Japan promised a looser monetary policy and financial-sector reforms, and Germany agreed to institute tax cuts. France, the UK, Germany and Japan agreed to raise interest rates.

Not every country fulfilled their agreements however. The US did not follow through on it's promise to cut the budget deficit - Japan was badly affected by the dramatic rise in the Yen- it's exporters unable to remain competitive overseas.

The impact of the intervention was immediate and within two years the dollar had fallen 46% to the deutsche mark (DEM) and 50% to the Yen (JPY). By the end of 1987, the dollar had fallen by 54% against both the D-mark and the yen from its peak in February 1985.The US Economy became geared more toward exports, while Germany and Japan increased their imports. This helped resolve the current account deficits and helped to minimize protectionist policies.

Currency speculation caused the dollar to continue its fall after the end of coordinated interventions. The Louvre Accord was signed in 1987 to halt the continued decline of the US Dollar and stabilize the currency. The United States pledged to tighten Fiscal Policy, Japan agreed to loosen monetary policy. The participants agreed to intervene if major currencies moved outside a set of ranges. The dollar rose shortly after the accord was signed.

Floating Exchange Rates, Definition

The Bretton Woods system of currency exchange rate management remained in place until the early 1970's. However, the system came undone as a result of increasing structural imbalances between nations. The U.S. dollar could no longer hold the value of the pegged rate of USD 35/ounce of gold as set out in the Bretton Woods Accord.

Smithsonian Agreement

A revision to the Bretton Woods Accord, signed at the Smithsonian Institution in Washington, D.C., in December 1971. This agreement aimed to maintain fixed exchange rates, but without using gold, and to allow greater fluctuation between currencies. While Bretton Woods allowed the dollar to float in a range of 1 percent, the Smithsonian Agreement proposed a range of 2.25 percent. The system set out by the Smithsonian Agreement did not work - the foreign exchange markets were forced to close in 1972, and when they reopened in 1973 they were no longer bound by the Smithsonian Agreement.

Bretton Woods Accord

The Bretton Woods Accord was established in 1944, towards the end of World War II. The United Nations Monetary Fund convened in Bretton Woods, New Hampshire, with representatives from the United States, Great Britain and France. The Bretton Woods Accord established the policy of pegging currencies against the U.S. dollar in order to stabilise the global economy. It set fixed exchange rates for major currencies and subsequently established the International Monetary Fund (IMF).

Up until WWII, the British Pound was the the dominant world currency by which most currencies were compared. However, during World War II the Nazis undertook a major counterfeiting effort against the British Pound, and thus damaged it's standing. In contrast, WWII transformed the U.S. dollar from a failed currency after the stock market crash of 1929 to benchmark currency by which most other international currencies were compared. The U.S. economy was thriving, and the United States emerged as a world economic power. The first element of the Bretton Woods Accord was to peg the U.S. dollar to the price of gold at $35.00 an ounce, using the Gold Standard. With this benchmark anchoring the U.S. dollar, other major currencies were pegged to it and allowed to fluctuate no more than 1% on either side of the set standard. When a currency's exchange rate would approach the limit on either side of this standard the respective nation's central bank would intervene to bring the exchange rate back into the accepted range. The Bretton Woods Accord governed currency relationships until the early 1970's when a floating exchange rate system was adopted.

SEC, Definition

The Federal regulatory agency established in 1934 to administer Federal securities laws. Banks and investors had lost great sums of money in the crash of 1929, and the depression that followed caused people to loose confidence in the markets. To restore investor confidence, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. The Securities and Exchange Commission was created to protect investors and regulate the securities markets.

Gold Standard, Definition

The gold standard is a monetary system in which a country's currency unit is freely convertible into a fixed weight of gold. The Gold Standard was used between 1870 and 1914 - currencies were fixed at a set exchange rate to ounces of gold. Countries that shared this fixed unit of account in principle shared a fixed currency relationship. The Gold Standard was dropped at the beginning of World War I and is no longer used in any nation.

Federal Reserve

The Federal Reserve is the central bank of the United States. It was created by the US Congress in 1913 with the Federal Reserve Act. Alan Greenspan was previously Chairman of the Board of Governors of the Federal Reserve, and in October 2005 President Bush nominated Ben Bernanke to be his successor.

The Federal Reserve serves to study and implement monetary policy. The Fed is made up of a central government agency in Washington D.C. - known as the Board of Governors - and twelve regional offices in major cities throughout the country.

The principle duties of the Federal Reserve are:

*Oversee and regulate the banking system - protecting the credit rights of the public.

*Carry out monetary policy

*Maintain the stability of the financial system.

The Federal Reserve System also includes the Federal Open Market Committee orFOMCopen market operations. who are responsibe for overseeing

Central Bank Intervention

Central Bank Intervention occurs when governments attempt to manipulate the value of their national currencies - they either flood the market to lower prices or buy up currency in order to inflate prices. A central bank may intervene if it's currency is weakening, in order to control inflation or to stabilize the currency in times of high volatility.

Interbank Market, Definition

There is no physical or centralized exchange in the forex market as seen in the stocks and futures markets. Multiple market makers are used (unlike the specialist system used by the NYSE). The forex market operates in a similar way to Nasdaq - and is also referred to as an over-the-counter (OTC) market. The backbone of the forex market consists of a global network of dealers - largely the major commercial banks of the world, who communicate through networks and by telephone.

The Interbank Market trades the greatest volume in the forex market. The Interbank Market describes the marketplace that exists between the largest banks, who trade with eachother directly, via interbank brokers or through electronic brokering systems such as Electronic Brokering Services (EBS) or Reuters Dealing 3000 Spot Matching. The rates can be seen by all banks - however each bank must have an established credit relationship with another in order to trade the rates being offered. Other participants in the forex market - such as online forex market makers - must trade through commercial banks.

The internet and online trading has allowed the retail trader more efficient and lower cost access to the forex market - through online fx market makers.

Dollar's Depreciation Inflates All Assets

There's a rule of thumb in markets, an inverse relationship between the dollar and common stocks that has been especially prevalent the past several trading sessions. When stocks rise, the dollar weakens. When stocks go down, you're likely to see the currency strengthen.

So it has been with the dollar and the S&P 500.

Click here to get Gary Shilling's latest advice and forecast in the November issue of his Insight newsletter.

"People sell dollars and buy assets priced in dollars," explains Keith R. McCullough of Research Edge LLC, a New Haven, Conn., market service, referring to assets like foreign currencies or securities denominated in foreign currencies, gold, oil or even real estate or whole companies. This trade has worked out splendidly this year as the dollar has dropped 16%, but common stocks are up 50%-60%, or more than three times the decline in the dollar's value.

It's brilliant. You make huge profits by turning dollars, 63% of the world's foreign exchange reserves, into assets that protect against the dollar's decline--and then some! Oil has doubled, and so has copper. Gold is up a surprising 25% this year, and energy and commodity prices are also higher in a weak dollar environment.

Real-Time Quotes

There are plenty of reasons why stocks should go up when the dollar drops. Since 40% of the S&P 500 earnings come from multinational operations abroad, a lower dollar means revenues from foreign currencies translate into higher earnings for U.S. companies, and higher earnings translate into higher stock prices. Just review the recent performance in Caterpillar ( CAT - news - people ) (61% sales outside U.S.), paint maker PPG (55% revenues outside U.S.) and McDonald's ( MCD - news - people ) (67% foreign revenues).

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Also, as the dollar falls, foreign investors especially see their buying power in the U.S. rise, making them more willing to bid for stocks and bonds.

Canadian energy, mining and financial stocks are jumping higher, and for U.S. investors, a declining dollar multiplies these gains. The iShares MSCI Canada Index (EWC) has doubled since March. Canada Report readers have done even better. Click here for all currently recommended stocks in the Canada Report.

Then, there's the so-called carry trade, which has been stimulated by the zero cost of borrowing dollars to invest in other assets.

"Since interest rates are zero, you can borrow dollars at no cost at all and use them around the globe," says Jeffrey Kleintop, chief market strategist of LPL Financial, a privately held brokerage firm based in Boston. "For example," explains Kleintop, you can borrow dollars at zero, and invest in Brazilian bonds yielding 5.2%. As the real (Brazil's currency) has risen 26% against the dollar so far in 2009, such a carry trade would have earned 31%, or double the loss of value in the dollar.

Gold and oil, especially, have an inverse relationship to the dollar, underscores Frank Holmes, CEO and chief investment officer of U.S. Global Investors ( GROW - news - people ), a mutual fund empire headquartered in San Antonio, Texas, that focuses on hard assets. "When gold is up, the dollar tends to be down, and vice versa," says Holmes. "Looking at weekly data going back 20 years, this relationship occurs nearly 70% of the time."

Holmes, manager of the U.S. Global Investors Gold and Precious Metals (USERX) fund, believes gold mining stocks are cheaper than bullion. "If the price of bullion goes up 10%, gold mining shares like Freeport McMoran, Anglo Gold and Newmont Mining ( NEM - news - people ) should rise by 20%."

For gold to rise to its former peak price of $850 in 1980, adjusted for inflation, it would have to double again to $2,300 an ounce, Holmes says. Holmes advises investors who want diversification among all commodities and foreign currencies to invest in Global Resources (PSPFX), a mutual fund his enterprise manages.

McCullough, of ResearchEdge, suggests buying iShares Brazil ( EWZ - news - people ), for the play on Brazilian commodities and iShares Taiwan ( EWT - news - people ), as a play on closer ties to mainland China. To play the dollar's slide, you could short the PowerShares DB U.S. Dollar Index Bullish ( UUP - news - people ), or buy puts on the exchange-traded fund.

How Interest Rates Play a Role in the Currency Markets

Interest rates play the foremost important role in moving the prices of currencies in the Forex market. As the institutions that set interest rates, central banks are therefore the most influential factors. Interest rates dictate flows of investment. Since the currencies are representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the Forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.

An increase in interest rates encourages traders to invest within that market and causes the demand for the currency to rise. As demand rises, the currency becomes scarcer and consequently more valuable. Investors are drawn to the currency, causing it to appreciate, because they will gain a higher yield on their investments, as in the Jane example. In order to purchase the country's assets (stocks or bonds), Jane will have to convert her domestic currency to the target country's currency also increasing demand. Conversely, a fall in interest rates discourage investors from purchasing assets in that particular economy, as the return on their investment is now smaller. The economy's currency will depreciate as a result of the weaker demand.