Before I am going to share a secret with you about USD….let me ask you a question.
Have you ever wonder on recently, why USD seem able to rally and seem strengthen after a series of weakening and before that USD seem like heading to a new low?
Some of you who have look into economic data of US so far should be thinking the odd for September of rate hike seem diminishing since the positive NFP data, others data seem quite bearish on US economic outlook for August. Especially, this week data release.
So you might be thinking, if the chances of US Fed rate hike is smaller, the US dollar strength should be weakening yet the US dollar seem able to support at its old level, some currency pair able to trade slightly higher than their old time low. Do you ever ponder, why is it so? Who are those who willing to buy and support at those level despite the rate hike odd has decreased. What is the reasoning behind?
So let’s talk about basic fundamental of Forex. Not sure how many of the readers care about fundamental of a currency but I heard before from a Barclay trader who claim he is No.2 in his Forex fund management circle where he is able to generate close to 800% return a year. You might be thinking now..Wu ya Boh (really or not/ Too good to be true) but after i traded myself with his concept, I can tell you with his understanding on Forex and their strategy, making 800% return a year for full time trader is really possible (Still relative new to Forex but i am already achieve close to 1/8 of his performance).
What make them in the higher odd of winning is this. For all full time traders in his financial institution, despite they use technical analysis most of the time, all of them able to memorize all the currency pairs that they traded, their currency pair interest rate. What do I mean by currency pair interest rate?
If they traded EUR/USD, they will know that US dollar central bank interest rate is at 0.5% while EURO central bank interest rate is at 0%. In a bigger picture and long term, they will want to buy a currency that has a higher interest rate. Why? Let me put into lay man term and show you some example, let say there is Bank A and Bank B, if you deposit your money at Bank A and they give you 1% interest rate every year compare with Bank B who offer you 2% interest annualy, which bank you will prefer to park your money, if both bank has almost the same level of reputation, security and the list goes on, what is their difference mainly are their interest rate. I believe you will choose…Bank B right! It is direct, of course we want to deposit our money in a bank that give us a…Better rate! That’s right!
So when come to Forex trading, come to currency pair it is obvious we want to bullish on those currency pair that has higher interest rate. This is the fundamental 101.
So, you might be thinking now. Ok, then what is it going to do with US dollar. Rate Hike odd for Sep is like 10 to 12% chances and don’t tell me you are going to tell me US dollar is strengthen and rally is due to Sep Fed rate hike odd.
My answer to your question is nope. In fact, I am going to tell you something totally different.
The reason is simple as this, even no further rate hike this year, USD still attractive. You might be confuse now and wonder what is this guy talking about but let me hold you on for a second, please be patience…let me just show you few things by doing the elaboration below,
On 2nd August, RBA (Reserve Bank of Australia) cut their rate from 1.75% to 1.5%
On 4th August, BOE (Bank of England) cut their rate from 0.5% to 0.25%.
On 11th August, RBNZ (Reserve Bank of New Zealand) cut their rate from 2.25% to 2%
What does all these mean? The global outlook is going to ultra low interest rate environment, every country is looking into more stimulus instead of recover their interest rate to their old time high.
This is contrary compare with US where they are in track to rate hike although the odd to increase their rate on this year is very difficult and challenging but if others peer are decreasing their rate while US Fed has the odd to increase..it will be looking so attractive now on US dollar. Please take a second to imagine and think about this, if during September US Fed did hike the rate, what will happen then? Can you imagine that?
This is why despite the rate hike odd is diminishing, the support of USD is still there, fundamentally it look attractive now. Remember the bank example?
Of course, this is just basic 101 intro to the currency, there is much more to it to justify the buying and that is the beauty of Forex.
Of course the bank example is a simple way to convey the concept of interest rate of a currency. The truth to it is much more due to its currency pair country’s domestic outlook and economic(like in a more professional way and more close to reality of saying : central bank of a certain country if raising interest rate will cause cause monetary tightening, reduce money supply, reduce inflation and so on…so that currency will be attractive and appreciate, yup i know it might be information overflow to you so let me just stop at here)
If this is new to you then you might want to explore more on this as it will surely help in your Forex trading. There are a lot of “secret” in Forex trading..the more you explore it, the less risk you will be exposed. Most of the people around me always think that Forex is just a gamble. Let me tell you, it is definitely not a gamble, it is the ignorance of people that don’t understand the risk make it look like gamble.
The truth to the Forex is we all have been trading Forex, either you buying something from oversea or you went for a vacation for oversea, we did the money exchange trading too right? So why is it when it come solely on trading the currency pair or Forex it become a gamble? That’s an interesting question for you to ponder about.
Before I end this sharing, let me share with you Warren Buffet quote to end this beautiful Friday night.
“Risk comes from not knowing what you’re doing.” – Warren Buffet
Have a great weekend ahead and safe trading and investing pals!