2Bull Forex Blog

Key bank to bank long term lending rates in Europe jumped to their highest since 1995 from 5.142 to 5.237 a move sure to reverberate through Interbank Forex markets. The six month rate also jumped to 5.315 from a former rate of 5.290. European rates are fixed by the European Central Bank. (Euribor) It is becoming painfully obvious that the financial crisis is not limited to the US.

The US financial crisis has become contagious, spreading to European banks and financial institutions and Interbank Forex markets worldwide. In the UK mortgage giant Bradford and Bingley had to be rescued by the government. Shares of French bank Dexia tumbled more than 20% because of a newspaper report that the bank may launch an emergency capital increase. On Sunday the governments of Belgium, Luxembourg, and the Netherlands announced an 11.2 Euro bailout of one of Europe’s largest banks.

Markets, including the Interbank Forex, have been in a state of disarray with global money markets waiting for the details of the proposed US bailout. The US congress is set to vote on the compromise bailout package on Monday, September 29th. After almost a week of political haggling Democrats and Republicans have reached an agreement. Highlights of the bailout plan include;

* The government would have broad powers to buy billions in mortgage related assets.

* The plan lets congress block half the money. The government can access 250 billion immediately, 100 billion more if the president certified it was necessary, and 350 billion more with a separate certification.

* Executives of companies who benefit from the bailout will see limited compensation.

* The plan requires the government to try to renegotiate bad mortgages with the intention of lowering monthly payments.

* The government would receive stock warrants in return for assistance, giving American taxpayers the opportunity to share in future profits.

* After five years the government would submit a plan to congress on how to recover any losses from companies receiving assistance.

Financial analysts are hoping that the passage of the US bailout plan will bring a semblance of stability to global markets. With the crisis spreading well beyond the borders of the United States passage of the compromise bailout plan is seen by many as a way to stem the tide of bank failures in Europe. Credit markets and interbank lending have all been virtually frozen by the US financial crisis and it is hoped that the infusion of billions of dollars will cause credit to flow freely again.

Trend in real terms may be defined as trading in the direction of trend, thus ignoring the trading signals which are directing against the current trends. The trends would remain friendly until the traders treat them as friends and not doing anything against their will and desires.

Most of the current trends are defined by looking at the daily charts that include line charts, bar charts and candlestick charts etc. However, those traders who have small cash amounts define trends in terms of 4-hour chart and 1-hour chart. Anyway, daily charts have their own importance because if the hourly signals match with the daily trend, then there are all possibilities of a strong movement along the trend.

Most of the traders while examining the charts try to capture the low and high peak of the trade which is against the trend. This means that the trader is lacking the main concept and that is discipline. It is surprising that while the trader is investigating his own faults and errors, simply ignores his major mistake and that is trading against the trend.

To define the meaning of the trend in detail, let’s take an example. You can explain the trend by taking the combination of four simple moving averages (MA). Suppose 5/20/40/60 is the four moving averages. Now if MA 60 is below MA 40; in other words MA 40 is above MA 60, then the trend is upward each time when MA5 crosses MA20 upward which means it is in the direction of the moving trend. On the other hand, if MS5 crosses MA20 in the downward direction, then signals are used only to close the previously opened position and vice versa.

In the chart given below, the red dots indicate the crosses of MA 60 and MA 40, whereas the red and blue lines denote the opening positions towards the current trends. Those traders who are in search of catching the peak price always open sell position near the blue lines. If the trader wants to open the position without the minimum analysis then he better go to places such as casino where people make the guesses but are not sure about it. Sometimes the MAs are not proving to be a good indicator but in terms of trend, they served as best trend indicators.

Here the green line denotes MA5 and red lines represent MA20. On the other hand, blue dot place the opening position towards the trend (MA20 is crossed by MA5 in the upward direction and red dot place the closing position (MA20 is crossed by MA5 in the downward direction).

In this chart, the blue dots depict the opening position towards the trend and the red dots depict the closing position. The basic idea behind the combination of four MA is that the small number pairs affect the relatively close trade and the big number pairs define the existence of the current trend. The purpose of the above mentioned examples is to remind you about the need of checking the direction of the trend before entering the market.

The forex market
is one of the largest, if not the largest market with up to two trillion dollars traded daily. Unlike stock exchanges the interbank forex market is not a centralized market. In a centralized market like the stock exchange there is a central every transaction is recorded by price and volume.

The forex market is a decentralized market with no central market where transactions are recorded. The interbank forex market relies on market makers who record their own transactions and the information is kept private. A market maker is a broker-dealer firm that facilitates the buying and selling of securities or currency. The primary market makers in forex are the world’s largest banks.

The interbank market is the system of trading currencies among the world’s largest banks and while most of the transactions are done between the banks themselves some banks do handle forex transactions on behalf of large customers. It has been estimated that 50% of all interbank forex transactions are between the banks themselves. The interbank forex is the source of price quotes that enable investors and brokers to make informed decisions.

According to the Wall Street Journal 73% of all interbank forex transactions are done through 10 major banks. Most of these banks maintain a separate group known as the Foreign Exchange Sales and Trading Department. Each Foreign Exchange department contains a sales and trading desk. The sales desk is responsible for taking orders from clients, getting market quotes and relaying that information to the client. The Trading Desk is responsible for making decisions based on market information and many traders specialize in certain currency pairs. Usually banks will have traders that are responsible for all trading in specific currency pairs, the EURO/USD for example.

Banks determine currency prices by a variety of factors; how much of a particular currency is available at the current price, the current market rate, inventory, and opinions on where the price of the currency is headed. Unfortunately banks are reluctant to share all this information with brokers and investors.

In the past the interbank forex market was the exclusive domain of the world’s major banks and small investors were excluded. Today firms are able to offer access to this dynamic market to individual investors. The interbank forex market is available 24 hours a day and quotes may be seen online for easy monitoring of accounts. The interbank forex market is no longer the province of banks alone. The interbank forex market is available 24 hours a day, six days a week so individual investors are not limited to traditional business hours. The interbank forex market offers some very exciting opportunities to investors, large or small.

A Forex Converter is a program that gives the value of one currency against another in real time. There are literally thousands of converters online all with the same function. Most of these converters are easy to use and list all the world’s currencies.

Most Forex converters are pretty straightforward and easy to read. Currencies are usually traded in pairs and most Forex Converters give current quotes in pairs. Most also have the ability to convert specific amounts of one currency into another. But what are the factors that make one currency more valuable than another? What causes the value of a currency to rise and fall?

First, who determines currency value? Currency value is generally determined by central banks, investors and Forex traders, and the laws of supply and demand. Central banks and large banks account for most of the world’s trade in currencies. Central banks set monetary policy that affects the value of that nation’s currency.

Several factors can affect the value of a specific currency. Some of these factors are;

Economic conditions - Economic factors affecting currency include inflation, monetary policy, unemployment, Gross Domestic Product, infrastructure, agriculture, balance of trade, government deficits, housing markets, and economic indicators.

Political Factors - Political stability, form of government, relationships with other countries, socialism vs. free market economy, and perceived political direction. (Liberal vs. conservative, democratic vs. totalitarian)

Natural resources - The possession of large reserves of natural resources and how they are exploited can have a great effect of a country’s currency. The use of advanced technology to use natural resources to the fullest is also a major factor. This would also include agriculture.

Educational level of the populace - An educated population is a great asset for any country. The amount of innovation and the development of new technologies depend on an educated population. Countries with low educational levels usually have currencies worth much less than those of countries with an educated population.

Believe it or not the perception of a country from outside can, and does, have an effect on the marketplace. The best and most recent example would be the current US financial crisis. World currency markets were closely watching the political situation in the US and any move the US congress made sent ripples through world markets.

While the above list is by no means complete it does list the more important factors that affect currency values. Looking at a typical Forex Converter one does not see the many factors behind the numbers displayed and the average Forex investor usually leaves researching these factors to their broker.

In a move sure to reverberate throughout the financial world the US House of Representatives failed to pass the US bailout by a vote of 228 to 205. Stock markets
reacted quickly and violently with the Dow falling 700 points. Political bickering was blamed for the defeat but several Republican legislators refused to support the bailout plan proposed by the Bush administration.

Democrats said the bill does not do enough to protect average Americans. In an excerpt from Speaker of the House Pelosi’s speech she stated, “Democrats insisted that legislation responding to this crisis must protect the American people and Main Street from the meltdown on Wall Street. The American people did not decide to dangerously weaken our regulatory and oversight policies. They did not make unwise and risky financial deals. They did not jeopardize the economic security of the nation. And they must not pay the cost of this emergency recovery and stabilization bill.” Representative John Culberson, a Republican from Texas, said the measure would leave a huge burden on taxpayers. “This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions.”

Credit markets remain frozen and the crisis has spread to Europe. Several banks have been taken over recently and in the UK the government had to bail out mortgage giant Bradford and Bingley. Banks and financial firms in both the US and Europe have essentially ceased loaning money to each other in recent weeks creating a serious credit crisis. Forex markets
also reacted and the future of the US dollar remains uncertain. The crisis stems from mortgage backed securities which saw their value plunge as home prices have gone into their worst slide since the Great Depression. In turn the market for these toxic securities evaporated leaving many banks holding greatly devalued securities which could cause the failure of firms holding these securities.

The failure of the bailout plan follows weeks of sobering news from the US banking sector. Monday morning, the Federal Deposit Insurance Corp. arranged for the sale of the banking assets of Wachovia, the nations fourth largest bank to CitiGroup for 2.2 billion dollars in stock. In other news, the Fed bailed out insurance giant American International Group, loaning it $85 billion in return for a nearly 80% ownership, and Washington Mutual became the biggest bank failure in US history.

Both the White House and Congressional representatives and Senators have indicated that the plan is not dead and that a compromise can be worked out. Markets around the world including Interbank Forex will be watching with intense interest.