Nouriel Roubini Predicts Gold Bubble Will Burst

Low interest rates, over-sized leverage and increased deficit spending have all contributed to the continued rise of gold prices. Still, some experts believe that the current gold bubble will collapse as the global economy starts to slowly recover, and the US dollar comes back into favor. For more on this, see the following article from Bullion Vault.

Nouriel Roubini was “one of the few to predict the financial crisis” reckons the Financial Times. Yet plenty of other chicken littles, amateur and professional, had long warned of trouble ahead, too.

Hence the 150% rise in Gold even before the crisis broke in August 2007. Set against negative real interest rates, unfettered bank leverage and runaway deficit spending, gold’s rare physical persistence looked a fair bet. And absent Armageddon or double-digit inflation, a growing handful of people chose to store a chunk of their change in metal, starting around 2001.

Oh sure, gold has since outstripped the S&P’s best-ever run of year-on-year gains (1982-1989). It’s not fallen for more than two consecutive months either since April ’01. But clearly, back then, and long before our present troubles showed up, these people were nuts!

At least, in Roubini’s world they were. Which brings us right up to date.

This decade’s three gold-friendly trends – of sub-zero rates, over-sized leverage and relentless state deficits – remain firmly in place. Sadly for fixed-income investors (i.e. everyone now or soon to be retired), the first and the third look set to blow up together, sooner or later. Quite when, who can be sure? But the quietly broadening move towards gold (Glenn Beck aside) rolls on as well. And so too, oddly, does the idea that Gold only rises on the back of runaway inflation in consumer prices…or a wipe-out Armageddon in stocks and bonds.

Those two eventualities would likely push gold sharply higher from here. We might just get them all at once if current trends persist for much longer. Better to take a position ahead of time, you might guess. But no. Not if you’re smart like Roubini.

“With no near-term risk of inflation or depression, why have gold prices started to rise sharply again in the last few months?” asks Dr.Doom himself of his RGE Monitor clients. Without those extreme events, this fall’s rise in the gold price must be a bubble, he says.

“When inflation is high and rising, gold becomes a hedge against inflation; and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven.”

So far, so fair. But Gold’s performance from 2003-2007 – when it rose alongside everything else except the Dollar – shows that true chicken littles tend to move early. Inflation hedging is wasted if you wait until inflation has struck. Safe haven hoarding comes too late once the depression’s begun. That’s why, we guess, ever-more chicken littles continue to buy gold regardless of what the latest data might say. Because the coming collapse of the sky won’t show in your rear-view mirror. Not unless, like a good many “gold bugs”, you actually crane your neck round…and squint at history to help guide your driving through what are proving historical times…

“Money printing typically leads to inflation; excessive leverage tends to blow up. Governments can in fact become bankrupt. The center of power rarely sits still for a century or more…”

The problem, of course, is that gold pays no income and earns no quarterly cashflow. That makes it invaluable on contemporary metrics, a fact most pundits mistake for worthless. And “Since gold has no intrinsic value,” says Dr.Doom, bounding ahead of his error, “there are significant risks of a downward correction.”

Yes, he acknowledges six basic reasons why Gold continues to rise. To save space – and show just why they might matter – we’ll summarize Roubini’s bull case as:
money printing;
bank leverage;
the Dollar;
falling mine output;
Asian gold hoarding; and
the ultimate “too big to save” of government itself.
Against this, however, Roubini foresees an end to quantitative easing and zero rates, buoying the Dollar. Or perhaps “the global recovery may turn out to be fragile and anemic, leading to…bullishness about the US Dollar.” Or failing that, “the Dollar-funded carry trade may unravel, crashing the global asset bubble…together with the wave of monetary liquidity it has caused.”

You will have spotted the common denominator. Massed against the six trends Roubini himself puts in gold’s favor, the US Dollar will prevail. One way or the other. Perhaps. Either way, gold’s recent rise to $1200 an ounce – let alone its jump to fresh all-time highs vs. all other currencies barring the Aussie Dollar and Japanese Yen – must be a bubble.

Because Gold, unlike the Dollar, has “no intrinsic value”. Or so says Roubini.

谢国忠：海外热钱来袭 明年楼市或“上上下下”

　　　房价在今年三四季度涨势惊人，其背后是否有海外热钱加速流入的因素？在明年人民币对美元升值压力将进一步加大的情况之下，应该如何防范投机性外资对国内房价的影响？
　　独立经济学家谢国忠对《每日经济新闻》记者表示，今年热钱主要流入了香港股市和内地银行，目前暂时看不出来是否直接流入了房地产市场。
　　上海易居房地产研究院综合研究部部长杨红旭在接受《每日经济新闻》记者采访时认为，今年实际流入房地产市场的热钱很少，这跟2007年的情况有明显的区别，因此今年即便热钱大规模撤离，也不会造成国内房地产泡沫破裂。
　　但对于明年的房地产走势，专家一致认为，明年人民币升值的压力还将继续存在，热钱大规模流入的可能性仍然较大，防范投机性外资影响国内房价任重而道远。
　　三季度海外热钱来袭
　　央行数据显示，今年9月末外汇储备余额攀升至22726亿美元，同比增长19.26%；三季度外汇储备增加1410亿美元，仅9月份就增加618亿美元，对比今年一季度外汇储备增加只有77亿美元来看，三季度新增外汇数量明显增多。
　　中金报告显示，三季度我国贸易顺差为393亿美元，外商直接投资为208亿美元，两项数据之和与三季度1410亿美元的外汇储备新增余额相差了810亿美元。剔除投资收益和汇兑损益，同时考虑到对外投资引起的资金流出，三季度不可被解释的资本流入或超过500亿美元。
　　杨红旭指出，这500亿美元大部分是热钱，其涌入内地的目标很明确：通过投资资产和股权获益，而且多是短线操作。其中股市和楼市是热钱投入的主要领域。
　　某股份制商业银行外汇专家表示，从今年三季度的统计数据来看，热钱确实有大量涌入境内的可能。
　　不过近期热钱流入已有放缓之势。上海一位热钱研究专家对《每日经济新闻》记者表示，”三季度热钱流入较多，但四季度流入速度有所放缓。主要原因是美元正在较大幅度升值，市场对美联储升息时间点的预计也有所提前。”
　　上述银行外汇专家表示，由于美元走强，人民币升值未达到预期，未来热钱流入速度会有所减缓，预计明年有可能会出现热钱大规模流出的情况。
　　不过他也指出，由于中国内地资本市场尚未完全开放，国家对短期资本的监控较严，实际上中国内地受到热钱的冲击比较小，反倒是中国香港地区面临的风险更大。
　　”近期，中国内地和中国香港地区都对热钱高度重视，内地采取多项措施遏制高房价，同时也借机打压热钱流入的积极性。此外，近期香港金管局的强势表态，对于热钱炒作具有明显的威慑作用。”该外汇专家说。
　　银行流动性宽裕助长楼市火爆
　　今年楼市火爆，其中一个重要原因是银行宽裕的流动性。
　　”流动性过剩，有可能造成资产价格膨胀，其中就包括房价上涨。”杨红旭说。
　　杨红旭分析说，热钱流入会制造流动性，而我国流动性过剩，主要有两大源头：一是信贷量过大，比如今年前三季度人民币贷款新增量达8.67万亿元；二是外汇储备增加过快，三季度外汇储备增加1410亿美元，对应新增9630亿元人民币。
　　但谢国忠认为，热钱对于楼市的影响属于间接影响，热钱流入导致外汇储备增加，银行流动性宽裕致使大量信贷资金进入房地产市场。他表示，今年热钱主要流入了香港股市和内地银行，至于热钱直接流入房地产，暂时还看不出来。
　　”今年房地产资金主要来自于银行贷款，而企业贷款也有部分进入了房地产市场，这成为支撑今年房价上涨的重要因素。”谢国忠称。
　　上述热钱专家也表示，香港地区的监测数据显示，热钱主要是流入银行，”热钱有流入房地产领域的迹象，但看上去规模还不是很大。”
　　前述股份制银行外汇专家认为，只要是追逐短期利益的资金都可认定为热钱，因此热钱可分为境外热钱和内生性热钱。今年炒高房价的应该属于内生性热钱。
　　杨红旭也表示，今年外资机构投资整栋房产的案例较少，大部分都是散户在进行投资。另外，与境内的投资热情相比，境外资金投资的比例还是比较小。
　　明年楼市或“上上下下”
　　对于明年房价走势，谢国忠的预测是“上上下下”。
　　”只要银行有钱，政府就会想办法不让房价大跌”，谢国忠说，房地产市场是中央财政的主要收入来源，现在的情况是，银行信贷支撑房地产，房地产支撑财政，国家通过银行信贷投放间接将资金转化成为了财政收入。
　　杨红旭认为，为防止境外投机性资金流入房地产市场，明年政府有可能再次重申”171号”文件。
　　所谓”171号”文件，即建设部等六部委于2006年7月份联合发布的《关于规范房地产市场外资准入和管理的意见》。在”171号”文件中，一个最为关键的要点是要求符合规定的境外机构和个人购买自用、自住商品房必须采取实名制。对于出台实名制的初衷，六部委相关负责人曾公开表示，主要为了防止境外热钱炒作房地产。
　　”该文件出台之后，对于外资炒房产生了很大的抑制作用，但是2008年文件的执行有所放松，预计明年政府会再次严格执行该文件的各项条例。”杨红旭说。
　　此外，上述热钱专家还指出，当前中国内地和香港地区均已出台房地产降温政策，可以预期还会有后续政策出台。这些政策将起到抑制房价过快上涨的作用。另外，国家应该密切监控热钱流入房地产动向，以便出台对热钱更有针对性的调控措施。
　　”总体上还是应该限制热钱跨境流动，这些流动通常不符合现有政策规定”，上述股份制商业银行外汇专家表示，国家已经出台一系列政策遏制部分城市房价过快上涨，这对房地产市场的影响是显而易见的。预计明年二季度之后，政策的作用会逐步显现出来。
　

Will the China property bubble pop?

Beijing, China (CNN) — When Crystal Zhang decided to buy a house last August, it seemed like a no-brainer.
For years, she had been spending a big chunk of her salary renting a studio apartment in Beijing, where she works as a mid-level executive in a multinational company. But her landlord kept hiking the rent, so she found a second-hand apartment and plunked 640,000 RMB (nearly US$100,000) as 52 percent down payment for a new home. She now lives in a cozy, one-bedroom flat and sets aside 25 percent of her monthly salary to pay for mortgage. “I hope to pay all up in five years,” says Zhang. “By then I can start making some other investments.”
Zhang, 30 and single, is one of the fortunate ones. The upwardly mobile professional has ample disposable income–and a good sense of timing. In just five months since she bought her 85-square-meter apartment, it has already appreciated by 38 percent. “I’m glad I bought this one when I could still afford it, even though its price was already high,” she said. “Now the price is ridiculously high.”
In big cities like Beijing, the red-hot real estate market has seen prices raise more than 50 percent the past year — six times the country’s total economic growth rate. According to Shanghai Uwin, which tracks housing prices in China’s richest city, average new apartment prices in the Pudong district soared by 57 percent to a record $4,061 per square meter, while overall prices in the city rose by 26 percent to $2,434.
Andy Xie, former Morgan Stanley chief economist for Asia, believes that China’s real estate and stock markets are a “bubble” that will burst when inflation accelerates in 2011. “China’s asset markets are a Ponzi scheme,” Xie told Bloomberg. “Property is heading for one huge bust that will take a year and a half to unfold.”
Even some real estate developers are getting anxious. Zhang Xin, CEO of SOHO China, agrees that the soaring prices are unsustainable, breaking ranks with other real estate tycoons. “When one gets fat, you need to cut weight” she told Forbes recently. “But this is like you haven’t started losing weight yet and food is coming again.”
Other analysts also see a bubble, at least in terms of affordability. “Even Chinese government statistics point to real affordability problems, with the income-to-price ratio in Beijing hovering at 1:22, when the IMF and the UN say the ideal figure is 1:3 or 1:4,” said Ashley Howlett, head of China construction practice for Jones Day. “The fact is that the average people cannot afford to buy apartments in Beijing or other major cities.”
Not all analysts share Xie’s dire prognosis. Real estate bosses, and some economists, think there is still room for growth, assuming that China’s rapid urbanization will continue.
Mei Jianping, professor of finance at the Cheung Kong Graduate School of Business in Beijing, believes that, “under the current low interest rates, the bubble is unlikely to burst, unless we have another crisis like last year or inflation suddenly surge.
“China is unique in the sense that there is nowhere for the middle class to put their money, low interest rates are low, equity markets are highly volatile, and corporate bond markets are small,” Mei said. “So putting money in real estate is not all irrational.”
The fact is that the average people cannot afford to buy apartments in Beijing
–Ashley Howlett, Jones Day Beijing
Irrational or not, many factors have created this exuberance in China’s property market. Massive bank lending over the past year, part of Beijing’s stimulus package, has found its way into real estate speculation. Low bank interest rates have encouraged other forms of investment and make mortgages cheap-prompting a mindset that “we might as well buy an apartment than leave the money in the bank”. Fear of inflation also makes investment in real estate attractive. Limited investment options make buying a house a preferred choice. One poll conducted by Tencent website revealed that most of the 360,000 respondents agree that “happiness is closely related to owning a home.”
If China is facing a bubble, will it end up like the U.S. did in 2008? Probably not, many experts say. Says Howlett: “The major difference between China and the US and the UK is the lack of ‘sub-prime’ lending and low gearing. There also remains a strong demand.” Mei Jianping agrees: “The bubbles are all inflated during low interest rate environment. The difference is that China is still growing and interest rates are expected to stay low for a while due to slow recovery.”
Beijing cannot afford a collapse in the housing market as it is one of the pillars of China’s economy. The property sector, analysts estimate, accounts for about a quarter of all fixed-asset investment in China and about 10% of national employment.
“The main way a bursting of the real estate bubble would hurt China is if it causes a sharp drop in real estate development, and thus a sharp drop in employment and the business activities of industries that feed the real estate sector,” Howlett said. Ashley thinks the government and the banks would probably continue to actively support the real estate sector to avoid such a scenario. “This is not an economy where price signals decide business decisions,” he said.
New home-owner Crystal Zhang remains optimistic of her investment. “The bubble won’t burst,” she said, citing measures that Beijing introduced recently to prevent a U.S.-style crash in home prices. “Whenever the bubble is about to burst, there will be measures taken to stop it.”

Top 5 Forex Events of the Decade

In 2010 we are ringing in a New Year and a New Decade. Before we start thinking about what could come in the next year however, we want to take this opportunity to talk about the 5 most memorable forex events of the decade. The past 10 years has been a rollercoaster ride for everyone. The highs include the birth of social networking, the growing popularity of Google, the online video revolution led by YouTube and debut of Apple’s iPod and iPhone products. The lows include the financial crisis, 9/11 and natural disasters. These developments have affected each of our lives but only a few have had a lasting impact on the currency market. Here are the forex events that have made our top 5 list. We encourage all of our readers to add your own in the comments section and if they are interesting, we may even collect them for an updated report!

1. Euro: Lives Up to Expectations, Becomes a Global Currency

The euro was launched on January 1, 1999, but it did not come of age until the past decade. Initially eleven countries joined together to launch the common currency and now the membership into the Eurozone has expanded to 16 nations with more countries itching to join the club. A total of 23 countries that do not belong to the European Union have even pegged their currencies to the euro. When the currency was first launched, there was a lot of skepticism about whether a single European currency would last and whether the European Central Bank would be effective in balancing a monetary policy that would be suitable for all member nations. In fact, the skepticism was so intense that the EUR/USD plunged from its initial rate of 1.18 to a low of 0.8228 by October 26, 2000. Fast forward a decade to the present and we now know that the EUR/USD has stood the test of time and proved to be one of the most successful financial experiments of the decade. Not only is the EUR/USD trading well above the level that it launched at, but it has also become the world’s second most actively traded currency after the U.S. dollar. More importantly, the euro has become the second largest reserve currency which means that central banks around the world have recognized that the euro is here to stay. The euro is already beginning to challenge the U.S. dollar’s status as the world’s primary reserve currency and it is an understatement to say that over the past 10 years, the euro has come a long way because in that time, it has proven to be a smashing success.

2. Carry Trade: Birth, Death and Rebirth

For anyone trading currencies more than a few months, you have most likely come across the term carry trade. For those of you that have not, in simple terms, a carry trade involves buying a currency with a high interest rate and funding that purchase by simultaneously selling a currency with a low interest rate. In the forex market, this is easily achieved since currencies are quoted and traded in pairs. The goal is to earn higher net interest income and hopefully capture some capital appreciation along the way. Carry trades were extremely popular throughout the past decade and particularly amongst retail investors. The reason is because it was a fairly straight forward trade that worked for nearly 5 years straight. Between the summer of 2002 and the summer of 2007, carry trades such as the Australian dollar / Japanese Yen currency pair appreciated more than 60 percent while the differential between Australian and Japanese 3 month LIBOR rates increased 16 percent. During this trade, anyone long AUD/JPY would have captured both the interest income and the capital appreciation. However the carry trade died a painful death in August 2008 when the financial crisis hit, causing currency pairs like AUD/JPY to give up 5 years worth of appreciation in as little 3 months. For 6 months after that, carry traders were afraid to come back into the markets but now that the financial markets have stabilized, we are beginning to see the rebirth of carry trades. As long as there is not another shock and central banks start to raise interest rates next year, the carry trade should continue to recover.

3. China Emerges as World Economic Power, Pulls the World Out of Recession

The rise of China has been one of the biggest economic stories of this decade. The Gross Domestic Product of China has increased more than 200 percent over the past 10 years from 9 trillion in 2000 to 30 trillion Yuan in 2008. Over this time, China’s average GDP growth has been greater 10 percent, helping the country become the world’s third largest economy by GDP. In just a few years, China is expected to overtake Japan as the world’s second largest economy. In that same time, China has also become the world’s largest holder of foreign exchange reserves which is why they are extremely important to the foreign exchange market. Although there are no clear statistics, it is estimated that more than half of their reserves are held in U.S. dollars and that they own close to 25 percent of all U.S. Treasuries held by foreigners. China has turned themselves into America’s largest creditor which means that they have tremendous economic leverage on the U.S. economy. One of the biggest threats to the dollar and the U.S. economy would be a massive sale of U.S. treasuries by the Chinese central bank. Imagine if someone came into the foreign exchange market and sold a billion dollars let alone any meaningful portion of China’s $798.9 billion investment in U.S. dollars. Even talk of this has hurt the dollar not only because of the foreign exchange impact that such a sale would have, but also because it would drive Treasury yields sharply higher. For this reason, the U.S. is affected by China just as much as China is affected by the U.S. – the two countries have become mutually dependent. On a brighter note, China’s decision to move to a floating exchange rate system that references a basket of currencies has increased their demand for currencies outside of the U.S. dollar. If China were ever to free float their currency, the impact on the foreign exchange could be even more dramatic as it would reduce their need for U.S. dollars and pave the way for the rise of the Chinese Yuan as a new reserve currency. More recently, China has proved their importance by effectively pulling the world out of recession. As a percentage of GDP the Chinese government’s massive stimulus package is the largest in the world and the results show that their stimulus package has helped to stabilize their economy as well as the Asia region as a whole. In fact many countries in and out of the Asia Pacific region have openly credited their recovery to the recovery in China. Over the next few years, we expect Chinese imports to become just as important more as Chinese exports, increasing China’s influence on the world.

4. The Great Recession Triggers Record Breaking Moves

One of the most defining events of this past decade is fresh in the minds of many investors because the world is still recovering from the greatest economic crisis in modern history. The crash of 2008 sent the Dow tumbling 40 percent between October 2008 and March 2009. Who can forget the day in September 2008 when the Dow closed down nearly 778 points, the largest single day decline ever? The subprime / banking / global economic crisis wiped out IRA and retirement funds, triggered massive layoffs in the U.S. and abroad, pushed many countries into recession, forced central banks to slash interest rates to record lows and governments around the world to open their pocketbooks and spend their way out of recession. Unlike previous recessions the severity of the latest recession has caused the demise of decade old institutions and families who have built their wealth over many decades. The global financial crisis also triggered a massive wave of deleveraging that pushed investors into the safety of the U.S. dollar and Japanese Yen. Between October and March, the dollar appreciated more than 10 percent and if we include the appreciation in the second quarter, the dollar strengthened more than 23 percent. High yielding currencies of countries that are particularly sensitive to export demand plummeted in the process. However thanks to the trillions of dollars those countries have spent on stimulating their economies, the worst is behind us. The global financial markets have stabilized and many countries have started to grow again. Yet the consequence of the being white knights is long-run fiscal sustainability. Countries like Greece have already come under the chopping block. Even though the U.S. and the U.K. are not vulnerable to a credit downgrade, there is a lot of fear that the rest of world may be unwilling to finance the burgeoning deficits.

5. Forex Trading Explodes

What has affected currency traders the most over this past decade is the birth of retail forex trading. Ten years ago, forex trading was limited primarily to banks, institutional investors, hedge funds, governments and wealthy individuals. However the popularity of the internet has dramatically changed how retail investors access the foreign exchange market. According to the Bank of International Settlement’s Triennial forex report, trading volume in the foreign exchange market has doubled in the past 10 years. As of 2007, daily turnover exceeded US$3.2 trillion and the latest poll from Euromoney suggests that volumes increased another 41 percent between 2007 and 2008. Retail foreign exchange traders have played a big role in the higher trading volumes and the growing popularity of the industry. As a result of increasing demand, transaction costs such as spreads have decreased, technology offerings have improved and value added services have exploded.
As we look ahead to the New Year, we want to recognize the contribution that has technology has made to economic growth over the past decade and we hope that another new industry will arise, helping to transform the world and fuel growth for decades to come.

Creating a trading plan

A trading plan is a must. I would be will to bet that virtually all successful traders have one. However, most new traders have no plan. In fact, I bet most new traders barely even have actual reasons for entering a trade. Imagine that you are planning to loan money to a new business as an investment. Could you picture yourself lending money to this person if they had no business plan and said they were going to start their business based on “their gut”? Of course a person would never be able to start a business by relying only on their gut. However, plenty of new traders start trading in exactly that manner.

Creating a trading plan is actually relatively easy. There are several core requirements that make up the plan. In my opinion, the main components of a trading plan are:

Trading objective (goals).
What and when to trade.
Money management.
The edge (trading strategy that puts the probabilities in your favor or a long sequence of trades).
Documentation and analysis of the results.
First, we have to define our trading objectives. Why are you trading? What is your end goal? Most new traders have completely unrealistic goals. For instance, a new trader might wan their $10,000 investment turn into $100,000 in their first year. While this is possible, it is highly improbable. These unrealistic expectations kill off a lot of traders before they ever had a chance. I think breaking even in the first year is an admirable goal; many traders do not do that. If a trader makes 20-30% on their initial investment in their first year, that is outstanding.

Next, we have to determine the basic outline of how to get there. What currency pairs (or other financial instruments) will you trade? This sounds simple, but it is easy to get off track by not defining this. I am in favor of utilizing as many pairs as you can comfortably manage, but I would not waste time with illiquid, choppy pairs. Other traders love choppy pairs. It’s up to you. You also have to determine when you will trade and how often you will trade. Are you going to be a day trader or hold positions for a longer period of time? Your schedule and responsibilities may have some impact on that. But it is important to define these basic ideas to begin to form some consistency.

Money management is probably the most important aspect of trading. Would you rather have a fund manager who was a great analyst, but used poor money management? Or would you rather have a manager who was an average analyst, but used perfect money management? I think the answer is obvious. Even the best analyst will eventually blow out their account if they don’t manage their risk properly. First, you need to determine how much risk capital you have to fund you account. Then you must determine how much you will risk on each trade. Most traders risk 1-3% of their account balance on each trade. This may sound low to the inexperienced, but after you blow our your account while risking too much, you will see why 1-3% is appropriate. It is also important to determine what your minimum risk:reward ratio will be. This could vary based on your overall trading strategy. Then calculate what your break-even winning percentage is. For instance, if your minimum risk:reward ratio is 1:2, you must win one out of three trades to break even.

Along with money management, it is vital to have an “edge”. An edge puts the probabilities in your favor and allows you win more than you lose in the long run. Without an edge that makes you money over time, proper money management will only delay the inevitable as your account dwindles. There are many different methods to acquire this edge, but it is important to find one that is compatible with you. Also, back-testing may offer some help in determining an edge, but I think its value is overvalued. I think the true test of an edge is actually using it for future to trades, which will expose flaws in your execution of the strategy that back-testing won’t.

The final step is to keep track of your results. I typically have a spreadsheet that has the following fields at the top of the page:

Date
Symbol (e.g.- EUR/USD)
Action (buy or sell)
Lots (how many lots were bought/sold)
Risk (in dollars)
Profit potential (in dollars; you need one column for each profit target you have in your strategy)
Result (profit/loss in dollars)
Equity (account balance after the trade has closed)
Notes (to keep track of anything I want to remember about this trade)
This format makes tracking results very simple. Please notice I track everything in dollars because that is true unit of measure, not pips. This format also makes it very easy to plot your account equity curve on a chart. There are a ton of statistics we can draw from this information that would take too long to write on this feature. However, the biggest perk of tracking your trades is that you look at the big picture. If you don’t write down this information, you will weight the past 3 trades very heavily and maybe be able to remember the past 10 trade results (but I doubt it). This spreadsheet will allow you to identify problems with your overall plan and trading strategy so you can fix them.

This is a pretty basic start to having a trading plan. Experienced traders know that many more details are eventually inserted into this template to prevent mistakes and encourage good habits. However, I feel the above is the bare minimum required to developing a viable trading plan.

Won’t give in over yuan

BEIJING – CHINESE Premier Wen Jiabao on Sunday struck a defiant note about the country’s controversial exchange rate policy, saying the government would not give into foreign demands to let the yuan rise.

Mr Wen said the currency was facing growing pressure to appreciate, but insisted that China was committed to keeping it stable, having virtually pegged it to the dollar since the global financial crisis worsened in the middle of last year.

‘We will not yield to any pressure of any form forcing us to appreciate. As I have told my foreign friends, on one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures,’ he said. ‘The true purpose (of these calls) is to contain China’s development.’

The yuan has fallen against the currencies of most of its trading partners this year because it has been fixed to a weakening dollar, while China’s economy has bounced back strongly. US senators have asked for an investigation into whether current yuan policy represents a form of subsidy that would justify tariffs on Chinese imports.

Mr Wen also repeated an oft-made declaration that the stable yuan had contributed to the global economic recovery.

A series of foreign policymakers, including US President Barack Obama, European Commission President Jose Manuel Barroso and International Monetary Fund chief Dominique Strauss-Kahn, have visited China in recent months to press for an appreciation of the yuan. But many analysts believe that Chinese leaders will want to see several consecutive months of increasing exports before letting the yuan resume the path of gradual appreciation it followed from 2005 to mid-2008.

UNDERSTANDING THE FOREX- EQUITY CORRELATION

With the S&P 500 and Nasdaq hitting year to date highs, it should not surprise currency traders that the dollar has extended its gains. Since the beginning of the month, the dollar appreciated more than 5 percent against the Japanese Yen and over 4 percent against the euro, Australian dollar and Swiss Franc. The only currency that has been stronger than the greenback is the Canadian dollar and even then the loonie’s gains have been marginal. Today, the loonie remains the only currency to strengthen against the dollar. The correlation between the foreign exchange and equity markets continue to dominate trading but it is important to realize that this is a new development on a quiet trading week with unusually low volume and market participants.

Understanding the Correlation Between Currencies and Equities
The correlation that everyone is focused on is the positive correlation between the dollar and stocks. There is an expectation that the U.S. dollar and stocks will rise in tandem on the belief that investors in both markets are banking on an accelerating U.S. recovery. It also means that the dollar is keying off U.S. fundamentals and not risk appetite as stronger U.S. data bolsters the confidence and attractiveness of dollar denominated assets. Although this may seem logical to many investors, it has not been the case for most of the year. In fact the illogical behavior of the dollar selling off on good data and rising on bad has dominated trading. The following table illustrates how the correlation between the S&P 500 and currencies has changed. Between last Thursday and today, the S&P 500 has had a 96 percent negative correlation with the EUR/USD and a near perfect correlation with USD/JPY. In other words, since last Thursday, a rally in U.S. equities has coincided with a sell-off in the EUR/USD and a rally in USD/JPY. However this is a new development because over the entire month, the correlation between stocks and currencies has been very weak. If we take a step back and look at the correlation between currencies and equities over the past 6 months, we can see that previously, the EUR/USD rose alongside equities. It remains to be seen whether this new correlation can hold and if it does, it would break a relationship that has lasted for most of the year.

Economic Data Preview and Review
Meanwhile the stronger existing home sales report completely offset the market’s reaction to the disappointing GDP report. After last month’s solid number, many people believed that the pace of improvement in the housing market would slow and even though it did, the 7.4 percent growth was extremely impressive. The number of units sold in the month of November hit 6.54 million, the highest since Feb 2007. This suggests that we could see similar strength in tomorrow’s new home sales report. Personal income, personal spending and revisions to the December University of Michigan consumer sentiment report are due for release tomorrow. Stronger numbers are expected all around. As for growth, the third release of GDP revealed that the U.S. economy expanded by only 2.2 percent in the third quarter, a far cry from the initial estimate of 3.5 percent. The details of the report pointed to weaker growth in personal consumption, gross private investment and government consumption. Personal consumption was revised from 2.9 to 2.8 percent while PCE was revised from 0.5 to 0.4 percent.

EUR/USD: CLOSING IN ON SUPPORT

It has been a bad month for anyone long euros. The currency has been on a one way downtrend with virtually no recovery. However, relief may be in sight with the EUR/USD closing in on a very important support level. The 1.4185/90 level represents the September low as well as the 200-day SMA and the second standard deviation Bollinger Band. Part of the reason why the Eurozone has not rebounded is because economic data has been light and the reports that we have been released did not help the euro. For example, German consumer confidence for January fell from 3.6 to 3.3. This week is a very quiet week in the Eurozone with no meaningful economic reports. The only economic releases on the calendar tomorrow are German import prices and French consumer spending. Meanwhile, the rebound in EUR/CHF has been far from impressive. Having hit a high of 1.4989 intraday, the currency pair is ending the NY session closer to its low. Thanks to the prior stabilization of the Swiss Franc, exports increased 1.6 percent in the month of November. However along with a 0.6 percent rise in imports, the trade surplus actually fell from 2.44B to 2.14B.

GBP/USD: UK ECONOMY REMAINS IN RECESSION

The British pound continued to weaken against the U.S. dollar, breaking its 1.60 support level in the process. Although GDP growth was revised upwards from -0.3 to -0.2 percent, the positive sentiment from the report was offset by the reality that the U.K. was the only major country that failed to grow in the third quarter. To the disappointment of policymakers, the country remains mired in recession. Unfortunately based solely upon the October trade numbers and the fourth quarter retail sales reports that we have seen so far, growth may have remained negative in Q4. The outlook for growth is a critical component of the Bank of England’s monetary policy decisions. Tomorrow, we will receive the minutes from this month’s central bank meeting which will indicate how many members favored keeping the Quantitative Easing Program unchanged. If the vote was relatively tight with a good number of monetary policy members voting for additional easing, the pound could come under further selling pressure. However if the vote was unanimous or if the tone of the minutes is slightly hawkish, the pound could easily rise back about 1.60. Aside from the GDP numbers, the current account balance was also released this morning with the deficit expanding marginally in the third quarter.

NZD/USD: GDP MISSES

Broad dollar weakness has pushed the Australian and New Zealand dollars lower but the Canadian dollar continued to buck the trend, rising for the third trading day in a row. Disappointments in both Australian and New Zealand economic data contributed to the underperformance of the Asian currencies. The New Zealand economy expanded by 0.2 percent in the fourth quarter, falling short of the market’s 0.4 percent forecast. For Australia, the Conference Board Leading index turned negative in October, signaling that the recovery in the Australian economy may be slowing. There was no economic data released from Canada but the rise in crude prices and the prospect of stronger GDP numbers tomorrow is helping to lift the CAD. The latest retail sales report indicates that consumer spending remains strong while the trade balance returned to surplus in October. According to Canadian Finance Minister Flaherty, there are no signs of a housing bubble at this time but if a bubble were to develop, he can tighten standards and make mortgages tougher to obtain.

USD/JPY: SIX DAYS OF PERSISTENT STRENGTH

For the sixth trading day in row, the U.S. dollar appreciated against the Japanese Yen, hitting a one month high in the process. In fact, the strength of the currency pair has pulled all of the other Japanese Yen crosses higher. Don’t forget that the reason why currency pairs such as the AUD/JPY are known as crosses is because their rate is dependent upon the value of USD/JPY and the AUD/USD. Japanese economic data also disappointed, which may have added pressure on the Yen. The latest report indicates that supermarket sales have been negative for12 months in a row while small business confidence dropped for the third consecutive month. Unlike large businesses, small companies have not benefitted from the global recovery. The divergence between the Tankan survey which measures the confidence of large businesses and Shoko Chukin report which surveys small businesses reflect Japan’s fundamental problems which is that stronger profitability in the corporate is not filtering into the rest of the economy. According to a Reuters poll, the sentiment amongst Japanese consumers has also fallen for the fourth consecutive month. There are no economic reports due from Japan tomorrow. The latest comment from Bank of Japan Governor Shirakawa that policy guided by short term price moves would destabilize the economy suggests that they have no plans to change monetary policy in term and economic fundamentals certainly support that.

USD/CAD: Currency in Play for Next 24 Hours

he currency in play for the upcoming next hours is USD/CAD. Canadian Monthly GDP data is on tap for tomorrow at 13:30GMT or 8:30AM EST. At the same time, the U.S. will announce Core PCE as well as Personal Spending and Personal income numbers. Shortly thereafter, the U. of Michigan Consumer Confidence and New Home Sales reports will be released at 15:00GMT or 10:00AM EST. Over the past 3 months, USD/CAD has been trapped in a range. The currency pair currently roams within the Range Trading Zone which we determine using Bollinger bands. A lack of trend and decrease in volatility has created an asymmetrical triangle that signals that a breakout is imminent. The upper boundary of the triangle acts as the key resistance level, particularly since it coincides with the 100-day SMA at 1.0680. Meanwhile support lingers at the 1st Standard Deviation which coincides with the bottom boundary of the same formation and the psychologically important 1.05 level.

Forex: The Reality of Thin Holiday Trading

It is a quiet week in the forex markets with many traders having already closed their books and off enjoying the holidays with their families. As a result, everyone has said to expect “thin trading conditions.” However many traders may be wondering what thin trading conditions really mean. By definition, it is an environment where trading activity is particularly light because of the lack of buyers and sellers in the market. This can lead to one of two completely opposite outcomes – breakout or range.

The reason why breakouts can occur in these conditions is because the lack of buyers or sellers creates a situation where it doesn’t take much to trigger a sharp move in the currency. However the lack of buyers or sellers can also lead to range trading if no one is motivated to take new positions.

Based upon how the EUR/USD and USD/JPY have traded over the past decade during Christmas week, the odds of a breakout this week are low. The following charts compare the trading range during Christmas week in the 2 currency pairs (red bars) to the average weekly trading range for the past 10 years. For the EUR/USD, aside from 2007, the trading range this week tends to be below average. For USD/JPY, the weekly range has also been below average every year except for 2001. In fact, the trading range this week in the forex market tends to be 25 to 50 percent less than the average trading range.

Treasury prices fell and the yield gap between the two-year and 10-year notes widening to near historic levels

NEW YORK–Treasury prices fell and the yield gap between the two-year and 10-year notes widening to near historic levels Monday morning, as riskier assets including stocks and commodities performed better and dimmed the allure of low-risk government debt.

Bonds were also pressured by comments from a Chinese central bank official, which raised concern about foreign demand for U.S. assets. A story in Monday’s Wall Street Journal suggesting U.S. interest rates may have to rise sooner than the market expects also added to the selling, traders said.

Zhu Min, deputy governor of the People’s Bank of China, noted that it is getting harder for governments to buy Treasurys because the U.S.’ shrinking current-account deficit is reducing the supply of dollars overseas, leaving fewer dollars to be recycled back to the highly-liquid Treasury securities. Mr. Zhu was referring to the situation globally, not specifically to China, the biggest owner of Treasurys outside the U.S.

Mr. Zhu’s comments were reported late last week, and they garnered traction as the trading session was devoid of major data releases. Trading is also thinning down in the Treasury market before the Christmas holiday this Friday.

Treasury yields rose “as concerns over foreign sponsorship for U.S. auctions and bearish street forecasts get the bulk of the early attention,” said David Ader, head of government bond strategy at CRT Capital Group LLC. “We’ll stop shy of suggesting the moves are sustainable solely on the `new’ information from overnight/this weekend, but will acknowledge the risks posed to a near-term bullish forecast.”

Foreign investors including central banks own about half of the Treasury market. The Treasury Department needs steady foreign demand to underwrite record amount of auctions in coming year to fund a widening budget shortfall and support the economy. If foreigners stay away from Treasury auctions, the worry is that yields may rise significantly next year, pushing up borrowing costs from the U.S. government, consumers to businesses.

The two-year Treasury note was 2/32 lower at 99 27/32 to yield 0.83%, the 10-year note was 13/32 lower to 98 5/32 to yield 3.6% while the 30-year bond was 22/32 lower to 97 29/32 to yield 4.5%. Bond prices move inversely to their yields.

With the yield on the 10-year note rising more than that on the two-year note Monday, their yield spread, known as benchmark yield curve, widened to 2.77 percentage point from 2.72 percentage point Friday. The gap hit 2.78 percentage point on an intraday basis in early June. On a closing basis, the gap touched 2.76 percentage point last week.

Dollar Strength Seen in Stocks 1st Since Lehman Died

Dec. 21 (Bloomberg) — The dollar is rallying in tandem with stocks and commodities for the first time since before Lehman Brothers Holdings Inc.’s bankruptcy last year sparked the financial crisis, signaling the worst may be over for the greenback.
The currency, equities and raw materials are on pace for their first simultaneous two-month gain since 2008 as the U.S. Dollar Index rises the fastest in 10 months. The gauge has moved in the opposite direction of either the Standard & Poor’s 500 Index or the Reuters/Jefferies CRB Index of commodities for 15 months straight and diverged from both in all but four.
Correlated trading reflects growing confidence in the U.S. economy and increasing expectations that the Federal Reserve will start draining some of the $12 trillion used to battle the worst global recession since World War II. Until now, the dollar climbed when traders sought protection from turmoil created by the credit freeze that started in 2007. It weakened when they took advantage of record-low interest rates by selling the currency to finance holdings of higher-yielding overseas assets.
The market’s “tremendous dollar-negative sentiment” is “being corrected,” said Adnan Akant, who helps oversee $39 billion and reversed bets against the currency two weeks ago as head of foreign exchange in New York at Fischer Francis Trees & Watts. “The regime is changing, definitely.”
The Dollar Index — which measures its performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona — dropped 4.5 percent this year. Its tendency to fall when stocks rise and vice versa, which has prevailed since Lehman’s September 2008 collapse, is breaking down. Until Dec. 1, stocks and the Intercontinental Exchange Inc. currency gauge moved in opposite directions on seven of every 10 days this year. They’re in sync more than half the time this month.
Gaining Gauge
With eight trading days left in the year, the gauge has gained 1.8 percent since the end of October, while the S&P 500 and the CRB Index added 6.4 percent and 2.1 percent, respectively. The last time all rose in a two-month period was April and May of 2008. The three indexes, which haven’t all increased in the same quarter since 2005, also are up since Sept. 30.
Currency strategists are growing less bearish on America’s legal tender versus the euro, predicting it will fall 1.1 percent next year to $1.45, up from Nov. 30’s weaker $1.48 forecast, median estimates of as many as 47 in Bloomberg surveys show. It will rise 8.6 percent against the yen, the median of 42 estimates shows.
The Dollar Index rose 1.6 percent last week. Its 4.9 percent rise from this year’s Nov. 26 low is the steepest since a 17-day climb ending Feb. 2.
Dollar, Yen, Euro
Last week, the dollar gained 1.6 percent against Japan’s currency to 90.49 yen and 1.9 percent versus the euro to $1.4338. It traded at 90.52 yen and $1.4356 per euro as of 7:44 a.m. in New York. The greenback is little changed against the yen this year and up 6.4 percent from its 14-year low on Nov. 27. The dollar is still down 2.6 percent compared with the euro in 2009, though it strengthened 5.5 percent since Nov. 25.
Euro speculators reversed course after having more bets on dollar losses than gains for seven months, Commodity Futures Trading Commission data compiled by Bloomberg show. Wagers by hedge funds and other large speculators that the dollar will gain against the euro outnumbered bearish bets by 16,448 on Dec. 15. On Dec. 1, bearish dollar contracts were ahead by 22,151, a sentiment that had prevailed since April 28.
U.S. Economy
News that the U.S. unemployment rate had fallen the most in three years pushed the Dollar Index up 1.7 percent on Dec. 4 as traders increased bets that economic growth would spur the Federal Reserve to raise borrowing costs. That was the biggest gain since Jan. 20, when the U.K.’s second bank bailout in three months increased demand for the dollar’s perceived safety.
“We are witnessing a watershed shift in sentiment regarding the dollar,” wrote Dennis Gartman in the Gartman Letter, a daily global markets commentary he publishes from Suffolk, Virginia. “We do not use the term watershed often, but when we do we mean it,” said Gartman, who correctly predicted in June 2008 that commodities would tumble.
The Fed is already taking steps to begin withdrawing money from the financial system. Policymakers will end most emergency lending programs and debt purchases by March because of “improvements in the functioning of financial markets” and stabilizing labor markets, the Federal Open Market Committee said on Dec. 16. At the same time, the central bank reiterated that interest rates will stay “exceptionally low” for an “extended period.”
Fed Drains
The Fed began using Treasuries and agency debt in reverse repurchase agreements this month to test a mechanism for unwinding unprecedented monetary stimulus, removing a total of $990 million in cash from the banking system in five operations since Dec. 3, data from the Federal Reserve Bank of New York show.
“The forex market will anticipate the Fed tightening and price it into the dollar, leading the dollar to rally,” said Steven Englander, chief U.S. currency strategist in New York for Barclays Capital. “Because these programs are so unprecedented, you can already see a high degree of alarm in markets with respect to what the rates implications are going to be when they are withdrawn.”
The unit of London-based Barclays Plc raised its three- month forecast for the dollar against the euro on Dec. 10 to $1.45 from $1.52 and its six-month prediction to $1.40 from $1.45.
Higher Yields
Investors are being drawn to the dollar by U.S. assets that have higher yields than in Japan and Europe. Ten-year Treasuries yielded 40 basis points, or 0.40 percentage point, more than German bunds as of Dec. 18, within 1 basis point of the biggest gap since August 2007. Investment-grade corporate bonds in the U.S. yielded an average of about 4.67 percent, compared with 3.78 percent in Europe and 1 percent in Japan, Merrill Lynch & Co. indexes show.
“The U.S. will be able to attract more capital than its peers in the developed world” for the next couple years, said Mark Farrington who manages $5.8 billion as head of currencies at Principal Global Investors Europe Ltd. in London. “The dollar appreciation will accelerate,” he said, predicting $1.25 per euro in 18 months and 105 yen in 2010.
Thanos Papasavvas, who helps manage more than $5 billion in currencies at Investec Asset Management in London, said the dollar’s strength against the euro is likely to end amid speculation on the timing of interest-rate increases by the European Central Bank.
‘Sell Dollars’
“There is a risk that the ECB could tighten monetary policy before the Fed,” Papasavvas said, predicting the euro will drop no lower than $1.38 before rising back towards $1.50 in the second half of 2010. “Foreign-exchange managers will be looking for opportunities to sell dollars.”
The Fed will raise its near-zero target rate by more than half a percentage point to 0.75 percent next year, while the European Central Bank will increase its rate to 1.5 percent from 1 percent, according median economist forecasts compiled by Bloomberg. Japan’s rate will stay at 0.1 percent, the survey shows.
The cost of hedging against a dollar rise versus the euro increased to the most in more than a year Dec. 17, so-called three-month 25 delta risk reversals show, an indication that options traders are more certain that it will appreciate. The cost of the right to buy the greenback versus the euro exceeded that for options to sell it by 1.80 percentage points.
PowerShares
The PowerShares DB US Dollar Index Bullish Fund ran out of shares on Dec. 18, and trading was halted for the second time in two months. The fund suspended issuing the 200,000-share blocks it uses to match demand for the exchange-traded fund, which is designed to replicate ownership of the dollar versus currencies measured by ICE’s Dollar Index, according to a filing with the U.S. Securities and Exchange Commission.
The dollar is also appreciating against the euro as investors focus on Europe’s economy. Standard & Poor’s and Fitch Ratings downgraded Greece and warned that Spain and Portugal also may have their credit rankings cut. U.S. gross domestic product will expand 2.6 percent in 2010, twice as fast as in the European Union, U.K. and Japan, median economist estimates in Bloomberg surveys show.
“Everyone is on the short dollar trade,” said Ihab Salib, who oversees more than $3 billion as head of international fixed income at Federated Investments Inc. in Pittsburgh and was betting the dollar would decline from March until it hit $1.4950 per euro in October. “When this happens, a reversal of that trade is likely.”