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Currencies are our business
Do you trade currencies for profit?
Explore our Tools For Traders. There you’ll find the well-known Currency Briefing, a weekly 18 page publication used by traders worldwide to keep up with the macro situation.
You’ll also find resources for trading currencies using options (in our view, the safest way to generate alpha with low tail risk). We have an e-book, Trading Currencies with Options which will help you get started. You’ll also find a very useful Excel spreadsheet which will help you design your own option spreads, or analyze what others are suggesting. It handles up to 4 different legs, plotting the P&L vs. spot, not only for the expiry date but for several intermediate dates.
Do you trade international equities or ETFs?
Or are you an importer/exporter with contract for payment in the future?In either case, you should be concerned about exchange-rate risk, which can severely affect your profits. Visit our Currency Risk Management page for solutions. We cater to the smaller clients without the in-house resources or knowledge necessary to inexpensively hedge currency risk.
The internet offers investors many sources of information, of varying levels of credibility. Seeking Alpha's author vetting program is designed to assure readers of a high level of integrity and scholarship.
During the course of publishing articles about macro-based forex trading at Seeking Alpha, I have earned SA's Gold Badge Certification, the highest achievable. This certification assures you that my content is accurate and unbiased, and that I have a spotless record with securities regulatory agencies.
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Seeking Alpha (www.seekingalpha.com) is the premier financial website for actionable stock market opinion and analysis. Handpicked from the world's top blogs, money managers, financial experts and investment newsletters, Seeking Alpha publishes more than 200 articles daily. Seeking Alpha gives a voice to over 3000 contributors, providing access to the nation's most savvy and inquisitive investors. The award-winning site is the only free, online source for over 3,000 companies' quarterly earnings call transcripts including all of the Russell 3000 Index. Seeking Alpha was named the Most Informative Website by Kiplinger's Magazine and received Forbes Magazine's 'Best of the Web' Award. |
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Who is Paul Stafford?
Paul has worked as a rocket scientist, an R&D engineer, a marketing manager, a commercial realtor, and now a foreign-exchange trader. The one thing all these careers have in common is the need to analyze and make decisions based on complex data. Paul loves numbers and analysis! Read more on the "About" tab.
Are you an experienced Foreign Exchange (FX) trader?
The 4X Trader Tools Currency Briefing is the perfect tool for FX traders who trade based on fundamentals.
The Briefing saves you HOURS every week by delivering all the important data you need - BEFORE the beginning of the trading week.It includes
- Relevant world news
- "Risk Aversion" indicator generated from counterparty risk, TED spread, VIX and other indicators
- US economic fundamentals (CPI, GDP change, current account balance, sovereign CDS rate, unemployment, and others), news release calendar, and the prior week news results
- Comprehensive review of comparative fundamentals, trading sentiment, news, technical charts, and commentary for the 5 major currencies: EUR, GBP, JPY, AUD, and CAD
- A compendium of the major commodity indices and relevant news, for use with the commidities currencies (AUD, CAD and NZD)
- A Country Economics chart comparing the top 18 economies with respect to current account balance and budget balance. This chart is very useful for those looking for economies which are dual surplus or dual deficit.
- User's Guide to understand the data included
Download a trial issue of the Briefing (PDF format)
Get the User's Guide to the BriefingSubscribe to the Briefing now - and see how the 4X Trader Tools Briefing returned more than 33% in 2009
SAVE $120! 12 months, $20/month -- billed monthly through Paypal
3 months, $30/month -- billed monthly through Paypal
Terms:
The briefing is emailed to you as a PDF file and MS Word file every Sunday at 1 PM Mountain Time (so you're ready to trade at the Sydney market opening). Please respect the amount of work and time that has been taken to create this valuable document, and do not share it with non-subscribers.Billing happens automatically and monthly, so your expense is spread out over time. You will receive a renewal reminder email two weeks before your subscription expires.
If you have further questions about the briefing, please contact Paul Stafford.
* Sources include (but are not limited to) Financial Times, Reuters, Bank of New York, Bloomberg, CNBC, CNN, China View, New York Times, RGE Monitor, PFX Global, ICSC, Mizuho Bank, Miche’s Global Trends, Market Oracle, Seeking Alpha, Dismal Scientist, Yahoo Finance, 321energy, Capital Link Shipping, and Kitco
- Have you thought about trading currencies, but didn’t know where to start?
- Would you like to diversify your portfolio into the largest, most liquid and transparent market in the world?
- Are you too busy to monitor markets, fundamentals and sentiment to trade effectively?
Our Currency Trading Signals Service (CTS) will help you trade the currency market, without having to make a large investment of time and effort.
This service will alert you to trading opportunities, and will also suggest several trade structures which will allow you to select the reward/risk profile you’re most comfortable with. We will also give you exit signals, profit range and stop-loss strategy.
While past performance cannot indicate future returns, we did rather well over the last 5 quarters. In 2009, 19 trades resulted in a win/loss ratio of 82%. The average win ($264/lot) was 2.25 times the average size of the 3 losses ($117/lot). The result was a net profit of 33.34%, with a maximum of only 15% of account equity at risk. 2010 is shaping up to be another great year -we’re up 7% in the first quarter.
How many signals might I see? Opportunities do not arise on a regular basis. Other trading signal products attempt to offer regular opportunities, usually based on some technical signal set-up. More mature investors know that this is not realistic. Real opportunities based on price dislocations from fundamental and sentiment valuation appear on an irregular basis, but across the major 6-7 currencies we usually see excellent opportunities a few times per month.
What do I get? Each CTS service signal [hyperlink to example] is a two page document describing the currency pair, directionality, date, current spot price and recent price action. We’ll include the supporting reasons for the trade, as well as any disconfirming evidence (it is rare in life that anything is black or white!) The signal will also contain several suggested trade structures, and the Value at Risk (90%, 7 day) associated with each one.
While the CTS service will also give exit signals, we will include our planned exit strategy, depending on whether we are seeing weak or strong price action, so that an investor may exit on his own. There is also a Stop Loss strategy. Finally, a graphical description of the P&L curve for the structure is included.
How fast must I act on the signal? Because we trade using fundamentals, the timing of the trade entry is not critical (+/- 50 pips will not make or break our trades!). Usually, anytime within a day or two will be fine, although sometimes we do get lucky and see large movements just subsequent to our own entry. You can select the form of notification you would prefer: email, SMS text, or even Twitter. The latter two will of course not be able to include all of the data the email will have.
How do I get started? If you would like to experience the returns and diversification of currency trading to your portfolio, but are too busy to stay abreast of 7 countries (and who isn’t!), the Currency Trading Signals Service is perfect for you. Six month subscriptions are only $50/month, billed monthly. This includes all the research, entry and exit signals, and a complimentary 3 month subscription to the weekly Currency Briefing (a $90 value). Start your subscription before May 1, and I’ll throw in a complimentary copy of my e-book Trading Currencies with Options.
Billing happens automatically and monthly, so your expense is spread out over time. You will receive a renewal reminder email two weeks before your subscription expires.
Currency Trading Signal Service 6-month subscription
6 months at $50/month -- billed monthly through Paypal
Have you wanted to try trading foreign exchange, but didn’t really understand it? Or perhaps you have traded forex on the spot market, and found that the risks seemed unmanageable? Maybe you’ve thought a little about forex options, but the textbooks describing option theory were too daunting.
Trading Forex with Options, by Paul Stafford, and edited by Kris Matthew
an accessible, readable primer on trading the forex market using options
Starting off with the basics of forex (what it is, which currencies are traded, the advantages and disadvantages of the forex market), I describe the nuts and bolts of trading the market. Pips, lots, bid-ask spreads, margin - it’s all there.
The second chapter helps you dissect price action into its components and understand volatility.
Options are up next, with a simple, intuitive description of how they work, how they are valued, and how they can be combined for maximum reward and minimum risk. Finally, and most importantly, I give several real life examples - how to select precise strikes and expiries depending on price action and volatility.
Take advantage of this distillation of years of experience and analysis, and begin trading forex profitably - with confidence and peace of mind.
Get the eBook -- just $19.95!
- Sample pages from the book -
One of the safest ways to trade foreign exchange is with options, enabling you to optimize return while minimizing risk. However, visualizing the profit and loss picture of various combinations of multiple options, and possibly an underlying spot position, is very difficult. It’s not too hard to sketch out the P&L at expiry, but the time decay component of options means that the intermediate P&L between initiation and expiration can be quite different than the final picture.
The Forex Option Analysis Excel spreadsheet takes all of the work and drudge out of the task. Easy drop down menu selections of trading pairs, Call/Put/Spot selection and other items makes it simple to set up the trade. Calculations of estimated spreads and cost to close the position add real-world accuracy to the results. A sample spreadsheet is shown below.
- 23 pairs of currencies supported
- Up to 4 legs: long or short calls, puts, and spot
- Each leg can be any number of lots
- Display of P&L at initiation, expiry and three intermediate dates
- Calculates net premium at expiry, unrealized value of positions and trade value
- Display can be centered around the current spot price or over the 10 year price history
- Displays individual and net Gamma and Delta
FREE VIDEO - see the spreadsheet in action and learn how to use it!
Get the spreadsheet! Just $19.95
The information contained in this spreadsheet is for general information purposes only. While I strive to provide you with a high quality product, I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the spreadsheet or the information and related graphics contained in this workbook for any purpose. Any reliance you place on such information is therefore strictly at your own risk.
In no event will I be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this spreadsheet.
Euro Not as Weak as it Looks
The 1400 pip decline in the Euro vs. the Dollar since December appears to me to be emotionally-driven selling, based mainly on the situation in Greece, although additional worries about the rest of the PIIGS may be factored in. While sentiment can drive the market for a while, I believe fundamentals should eventually drive the exchange rate back towards 1.45.
The situation in Greece is indeed dire. The current account balance is -9.7%, the budget balance is -9.5%, unemployment is 10.2%, and industrial production is plunging (-7.6% YoY). There are riots and strikes, widespread tax evasion, and a deep distrust of the government. In response, Greek officials have initiated their third austerity program, announcing budget cuts, and tax increases totaling $6.5B. Initial market response is positive; with the latest 10 year bond sale of $6.8B oversubscribed by a factor of three. If a rescue is still needed (i.e. if they can’t roll over more of the short-term debt), the IMF will likely step in. But most relevant to this discussion, Greece is a tiny part of the whole. And the whole is doing pretty well!
The EZ current account has made a dramatic improvement YoY (see chart below, courtesy ECB), and the budget deficit is only -7% (compared to the UK at 14% and the US at 10.5%). Industrial production jumped 1.7% in January alone, the sharpest movement since the data series began in 1990. Unemployment is inching down. The ECB, arguably the worlds most independent central bank, is already planning its exit from excess liquidity programs; unlike the US (the Fed indicating its current regime to remain in place for an extended time), Japan (perhaps just now initiating its own QE) and the UK.
The table below shows the GDP and sovereign risk associated with some of the relevant Euro Zone members. I have calculated the probability of default from the CDS rate spread over a “riskless” asset (assumed at 2% return), by the relationship prob(default)*(1+cds rate) = 1+ riskless rate. (Assuming a risk-neutral investor). CDS rates are as of 3/12/2010, quoted from Markit.
We can see that the main economic engines of the Euro zone are large and in charge. Calculating the GDP-weighted risk of the PIIGS default impact on the EZ shows rather small risks. I recognize that sovereign CDS rates are not an exact science or precise measure of default risk, but they do offer a useful relative indicator. Fitch still rates Spain at AAA, Ireland at AA-, and Portugal at AA, compared to Greece’s BBB+.
Of course, the lessons of 2008 have not left me, and countries, companies and banks do not operate in a vacuum. The high degree of interdependence (e.g. Greek bank exposure to CEE countries) means that we must assume some level of correlation between problem areas. But the magnitude of risk is just not as high for the other PIIGS as it is for Greece.
Euro sentiment has been quite bearish since December. The 25-delta Risk Reversals have been quite negative for months (as posted by Super Derivatives), indicating market maker bearish sentiment. Trader Sentiment has trended increasingly bearish for months. Currently, there are 107,410 shorts to 32,589 longs on the CME. The last two weeks spot price has shown a slight upward trend, which could be a realization that the euro is oversold.
Perhaps it is time to realize that Greece is but a tiny part of the whole, and the euro is much stronger than sentiment would have us think.
Are you an exporter or an investor in international equity or bond funds?
- Are you expecting payment in the future for goods or services denominated in a foreign currency?
- Have you invested in foreign equities? ETFs (eg Brazil, India, Russia, Mexico)? American Depository Receipts (ADRs)?
If you answered yes to either of those questions, you are exposed to currency exchange rate risk. The impact can be significant - read on!
Exporters: an exporter based in the US, shipping goods to Europe, could easily lose most or all of his profit. The figure shows the exchange rate of the euro vs. the USD during the first quarter of 2010. If you billed in January for an April delivery, the loss is huge, roughly 7%. That could represent the majority of your expected profit margin.
Investors: Investing in foreign equities,whether directly or through ETFs or ADRs, is becoming more popular, as emerging markets are generally growing faster than the developed markets. However, doing so exposes the investor to exchange rate risk on top of the speculative risk.
Let’s say you were bullish on Germany, and invested in a DAX (German) index fund for the first quarter of 2010. If you were lucky enough to buy near the low of 5,600, the 600 point rise represents nearly an 11% return in only three months. However, given the 7% depreciation of the euro vs. the USD in the same period, when you repatriate your profits, the net result will only be about 4%!
This effect can be much worse when investing in emerging markets such as Brazil, Turkey or India, where the volatility of both the equity markets and the currency exchange rates are much higher.
What can you do about it? Use the tools the big players use!
Hedging can take the worry out of your operations or investments.
Hedging can reduce or negate the exchange rate risks we’ve pointed out. Hedging can be complicated if you’re not familiar with the tools and structures used, such as currency options, risk reversals, futures or forwards. But don’t worry - we’re here to help you set up your custom hedging program. Based on your specific situation, we’ll select the most appropriate hedging vehicle, selecting maturity dates and strikes to maintain the desired hedging ratio, and other related tasks.
What does it cost? The cost of the hedge instruments (futures, forwards or options) depends on many factors, but is usually only a few percent of the underlying transaction size, and can sometimes be almost negligible. Our fee for setting up and managing the hedging positions depends on the transaction size and a few other factors, but is also less than a few percent.
What are the risks? The only risks to a properly-constructed hedge are what are called counterparty risks. That is, the possibility of default by the bank or institution that sold you the hedging instruments. We only use large international banks as prime brokers. Your biggest risk is doing nothing to hedge your exchange rate risk!
How do I get started? Since everyone’s needs are different, we need to talk with you to understand your particular situation. Our staff is knowledgeable and easy to work with. Unlike the large investment banks, we will assist the small to medium-sized company or investor, at a price you can afford.
Contact us today to discuss your currency hedging needs [links to contact page]
NEW! a must-read for anyone trading in forex: The Fallacy of Outsize Returns
Who is Paul Stafford?
A guy who loves complex analysis! He started out as an engineer at NASA, designing image processing hardware used in infrared astronomy. Paul then continued his engineering career at Hewlett Packard, where he specialized in calibration algorithms for RF and microwave signal analysis and generation. With several patents under his belt, he moved to the marketing and finance side of HP and became fascinated by the economics of the business. Paul’s new focus became ROE, NPV, IRR and other investment metrics.
After his wife Julie won a very prestigious art award (the proverbial “kick in the butt”), Paul and his wife moved from the San Francisco Bay Area to a home in the woods west of Missoula, Montana, where she works as a full-time artist (www.JulieTChapman.com). Paul began a new career in commercial real estate, where his experience on the financial and business side of HP resulted in a mastery of income property analysis (and happy clients). After discovering ForEx and tackling it like any other engineering problem, Paul noted the essential randomness of the market, very low signal to noise ratio and the risk/reward dangers. He has developed a trading approach - using options in conjunction with fundamental analysis - which matches the market characteristics. Instead of utilizing the technical trader’s tools of RSI and MACD, Paul has focused on the deeper economic indicators of current-account balance, balance of trade, differential interest rates and unemployment. His weekly newsletter, the Stafford Currency Briefing, is a direct result of his own weekly preparations for trading currencies on the fundamentals. |
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All comments and opinions are solely those of the author. Information on this site or in the newsletter has been obtained from sources believed by the author to be reliable, but the accuracy, completeness and interpretation are not guaranteed and have not been independently verified. Opinions expressed are subject to change without notice and, due to the rapidly changing nature of currency markets, may quickly become outdated. The opinions and information presented do not constitute a solicitation for the purchase or sale of any securities or options on securities.