An interesting week for the evolution of Forex!
Coming just after leading US based intellectuals calling for the dethroning of "King Dollar" in an NY Times op-ed, we are moments away from a vote that could cause a major shakeup of the Eurozone, potential crash of the GBP, and creation of a new Scottish currency yet to be named. This will be very interesting considering Scotland's currency history, during the 18th and 19th centuries many Scottish banks issued their own currencies. And some have suggested they might try Bitcoin.
Meanwhile, the Ruble is at historic lows against the US Dollar, on the same day that China announced a "Stealth QE" program. Moscow is 'warning against panic' as the ruble plunges - obviously these officials don't understand the West's version of Forex policy (to destroy your currency as much as possible via ZIRP & QE).
Sanctions are meant to 'punish Russia' but isn't the purpose of QE, Abenomics, and similar strategies to lower the value of the currency as much as possible to boost exports? Since the breakup of the Soviet Union, the Russian economy has grown rapidly and strongly. They have one of the fastest growing middle classes in the world, less poverty than the United States, and new generations of industrial technology such as Nuclear plants that do not produce traditional waste. When Russia implemented the market based system they have now, they had to reinvent themselves. Development was a necessity - not a luxury of trust fund babies making businesses out of hobbies in their parents garage.
Scotland will have to do the same; and the foundation of their new system must be a robust currency system and monetary policy. Given modern technology this is a lot easier to do than 100 years ago. Also there are now hundreds of examples of alternative currencies. NZD/USD now trading at about .81 - the GDP of New Zealand currently 182 Billion. The GDP of Scotland is about 216 Billion.
Of course, part of how the Euro was sold was on the basis of a consolidated currency, that it would be good for trade, save money on exchange, a consolidated bond market, etc. But the crisis in the Eurozone is showing the cracks in that model. This t-shirt eloquently explains why a consolidated currency will never work in a diverse region of different languages, cultures, and markets:
Trade the vote
A simple strategy to trade the vote, of course if your broker will clear the trades (already we are receiving volatility notices); buy a long straddle (put and call) on EUR/GBP, GBP/USD, and GBP/JPY. If you live in the Dollarzone and can't access Forex options, this can be done with spot Forex by placing 2 limit orders 50 pips above and below the price going into the vote with a trailing stop (likely only one will get triggered). If GBP spikes 100 - 200 pips, the limit order will get triggered and then you will have to close it manually or let the trailing stop take it out. Of course in this scenario it's questionable if your broker would honor the limit (especially if there is a server malfunction or bottleneck of orders as happened when the SNB intervened and subsequently crashed a bunch of FX servers). Another situation that can happen though is as initial results come in the market can swing violently in one direction and then the other as we have seen during many Fed announcements. Guid Luck!
Scottish coins, including a unicorn from the reign of James III. Photograph: Kim Traynor/Wikipedia
GIH: Latin America should not be disregarded, it was an Asian crisis in 1998 that shook worldwide markets. Brazil is a growing player in the global economy, and the Venezuelan stock market has been on a bull run. What happens in Latin America deeply affects the world. Take a look at these disturbing Forex charts:
With today's plunge, Latin American currencies have collapsed by over 5% in th elast 2 weeks - the fastest drop in almost two years. Year-over-year this is a 15.75% drop, the largest such drop since Lehman. This drop breaks the 2009 lows and presses the currencies to their weakest since 2003... Bond markets are being crushed as short-dated Argentine BONARs have collapsed to 14 month lows.
LatAm FX at 11 year lows...
Argentina BONAR have seen firmer days.
The Forex market is dead and dying, in parallel with the US economy; which is fitting, considering the US is still the world reserve currency.
Significant harbingers that have changed the Forex market forever:
- Dodd Frank has killed/consolidated retail Forex in the US (significant because the US is the world reserve currency), leaving less than 10 retail Forex brokers in the US, compared to several hundred in jurisdictions such as the UK, Cyprus, Australia, and a growing retail Forex presence in China. New Forex products, such as Binary Options, are being offered exclusively to a non-US customer base.
- Still, only one major US bank, Ever Bank, offers multi-currency deposits.
- Forex banks are under investigation for 'manipulating' the Forex market (which is impossible). Still, Forex traders are getting fired or put 'on leave' pending investigation. Meanwhile, Forex volatility is extremely low.
- China stepping up it's Forex operations internationally, but more important, even Robert Gates is concerned about the growing Chinese Military (even though they can't manufacture jet engines). And as people who understand the realities of global power, the US Dollar is backed by bombs, not by the world's endless love of the United States, and our freedoms.
- Dwindling support of the Fiat currency system, exemplified by Bitcoin and Bitcoin clones, to attemps by China to hoard Gold, and even Germany making (at least publicly) a typically German attempt to repatriate their Gold.
- Douche Bank exits Gold price fixing cartel, not directly connected to Forex, however DB is the largest volume bank in Forex trading, and Gold one of the only 'metal currencies' as an alternative to Fiat Forex, or at least the most popular.
For those readers who believe this is all part of a 'conspiracy' to issue in a one world currency, read the following Kissinger transcript post Nixon shock (in part):
Secretary Kissinger: But if they ask what they’re doing—let me just say economics is not my forte. But my understanding of this proposal would be that they—by opening it up to other countries, they’re in effect putting gold back into the system at a higher price.Mr. Enders: Correct.Secretary Kissinger: Now, that’s what we have consistently opposed.Mr. Enders: Yes, we have. You have convertibility if they—Secretary Kissinger: Yes.Mr. Enders: Both parties have to agree to this. But it slides towards and would result, within two or three years, in putting gold back into the centerpiece of the system—one. Two—at a much higher price. Three—at a price that could be determined by a few central bankers in deals among themselves.So, in effect, I think what you’ve got here is you’ve got a small group of bankers getting together to obtain a money printing machine for themselves. They would determine the value of their reserves in a very small group.There are two things wrong with this.Secretary Kissinger: And we would be on the outside.Mr. Enders: We could join this too, but there are only very few countries in the world that hold large amounts of gold—United States and Continentals being most of them. The LDC’s and most of the other countries—to include Japan—have relatively small amounts of gold. So it would be highly inflationary, on the one hand—and, on the other hand, a very inequitable means of increasing reserves.Secretary Kissinger: Why did the Germans agree to it?Mr. Enders: The Germans agreed to it, we’ve been told, on the basis that it would be discussed with the United States—conditional on United States approval.
Secretary Kissinger: They would be penalized for having held dollars.
These are not very sophistocated guys, according to the transcript (Conspiracy Theorists are encouraged to read the FULL transcript), but it does give credibility to the rumor that Arthur Laffer explained economic policy to Dick Cheney and Donald Rumsfeld in a bar by drawing a half circle on a napkin.
So, how does the Death of Forex have an impact on my portoflio? How is this information valuable to me, and not just for Fortune Cookies?
1. If you are considering participating in Forex, or are already doing so, and you are a US Citizen or live in the US, consider setting up something outside of US, legally.
2. If you are a portfolio manager, hedge yourself from a potential collapse of your domestic currency. There are plenty of high quality articles on Zero Hedge that outline this, just remember that if the US Dollar collapses it may be orchestrated with the ECB, now being run by an American trained MIT alumni, so if the USD goes down it doesn't mean exactly that the EUR will go up.
3. If you are investing internationally, be sure to hedge your Forex position with forwards, options, and avoid huge bank spreads that can be as high as 14% of your total transaction (up to 700 pips per side).
4. Unless you are forced by circumstance, or are extremely intelligent, experienced, and sophistocated, DO NOT INVEST IN FOREX, especially with 3rd party 'managers' that boast consistent usually unrealistic returns.
5. Stay out of cash as much as possible, a big Forex market event can create hyperinflation, or even black market rates as we've seen in Argentina and India, or make the use of currencies in certain venues difficult or prohibited.
A final thought, about the biggest players in the world's largest market by volume. Germany is the economic backbone of the Eurozone and thus the Euro. Euro is currently the only alternative to the US Dollar, and US Bond market. Here's a passage about the banking culture in Germany, with their most important FX banks:
The Commerzbank Tower is 53 stories high and unusually shaped: it looks like a giant throne. The top of the building, the arms of the throne, looks more decorative than useful. The interesting thing, said a friend, who visited often, was a room at the top, peering down over Frankfurt. It was a men’s bathroom. Commerzbank executives had taken him up to the top to show him how, in full view of the world below, he could urinate on Deutsche Bank. And if he sat in the stall with the door open …
Just a thought, considering the current cases against the FX trading banks, maybe it would have been better, in hindsight, to instead invest in some dynamic model for FX. But every organization reaches it's ultimate level of optimization, in the case of this Forex environment, it involves the excretion of one of the few products we can all agree that Germany does well (beer), and is combined with the alleged manipulation (cheating) of FX dealers. It paints a sad and surreal death to the modern Forex market.
The below recently declassified transcript of an internal meeting between Kissinger and his advisers shows an alarming degree of incompetence from all sides. Remember, this was during a period of great economic turmoil, after the Nixon Shock, and the infancy of the modern Forex market as we know it.
There are those who believe in conspiracy theories, that Kissinger with international advisers spent the weekend with Nixon plotting to default on the Gold obligations thus creating the floating currency system, in order to implement a one world currency decades later. What this transcript indicates, if not proves, is that there is no conspiracy, and the people who created the modern Forex market have no clue what they are doing, and had no model or even a plan for that matter, when they created the Forex market.
FOREIGN RELATIONS OF THE UNITED STATES, 1973–1976
VOLUME XXXI, FOREIGN ECONOMIC POLICY, DOCUMENT 63
63. MINUTES OF SECRETARY OF STATE KISSINGER’S PRINCIPALS AND REGIONALS STAFF MEETING 1
Forex is a unique market in that it's not traded on an exchange. This leaves open a plethora of possibilities how banks and brokers structure their Forex offerings. Typically, providers of Forex market access simply offer an increased spread. The STP model, now the most commonly accepted, takes client orders and passes them through to a number of ECNs, charging a small spread. For simplicity sake, let's use EUR/USD 1.3418 / 1.3419 which is a 1 pip spread. A broker or bank may tack on an additional 1 pip in the form of a fee or spread markup for the client order. While this doesn't seem like much, 2 pips is 200% of 1 pip. That means it's a double fee.
In 2011 while Dodd-Frank was being implemented, Elite E Services developed a fair model whereby traders were charged 5% of the trading profits with no increased spread. This was done for a number of reasons, but most importantly, through extensive testing of high frequency Forex systems, even a .1 spread increase would impact profits. Basically, the spread can be killing profitability. This is exaggerated with active systems that trade frequently.
The model was a success! Hundreds of accounts opened, some of them trading EES systems, but others, trading systems such as MDP that performed better on a fast, low spread MT4 server. But after only about 6 months (which seems to be the unofficial time window to make money at any particular broker) bad things started happening. The broker's server crashed. All the client losses were very fairly reversed by the broker, but the problem persisted. The servers crashed again, and again and again. Then other problems with this model surfaced, such a growing compliance department in this brokerage that thought the model undermined the spread markup model that was key to their business. Then other IBs who are dependent on overcharging on fees, started complaining to the broker, and to the regulators, that this concept was taking away from their fee based business, and that the model was flawed because most clients are losing, so by taking 5% of the client profit, it wouldn't enable this model to be viable.
It is the schism that has developed in many industries, in the case of Forex, trading vs. marketing. The majority of those in Forex business are in the marketing business, not the trading business. Traders look at trading as a means of profitability. If you have a decent strategy, it is possible to earn a living by trading for yourself, no clients. This means that most marketing material you see on the internet advertising trading systems, is not likely profitable, or at least not sustainable. That is not to judge all who are selling systems, but simply that if you have a strategy that works, why would anyone bother marketing it and selling it?
In any event, there still is an honest and profitable approach to Forex. This is one example, there are many others. The end game of the Global Intel Hub project is to open our own Forex investment bank, where traders can participate in the Forex market in a meaningful way.
In Global Intel Hub, we not only offer members ways and means to trade Forex honestly and profitably, we post any info on other environments that provide similar circumstances. Global Intel Hub is only $10/month for basic membership, so there's no reason not to sign up today for the hub if you are a Forex trader or are in the Forex business. In addition to this, Global Intel Hub members receive regular markets analysis based on a global macro intelligence view, and tools to help them trade such as Expert Advisors, custom indicators, access to VPS services, and training resources.
Due to the spotlight being shined on large banks accused of manipulating the Forex market, traders are noticing and recording 'odd' events that would be too much of a coincidence to happen by chance. An anonymous Zero Hedge author notes:
With regulators finally catching on that banks are manipulating every asset class, the largest of them all - foreign exchange - has come under scrutiny. Most specifically, there is considerable attention being paid to manipulation at the "London Close" around 11amET each day. Judge for yourself - see anything 'odd' around that time of day?
Goldman Sachs is the latest Forex trading bank to be added to the list of banks being investigated for rigging of Forex rates used to price other derivatives, and for benchmarking purposes, known as the WM/Reuters rates. However the investigation against Goldman Sachs also includes commodities, options, and technology systems. Bloomberg reports:
Goldman Sachs Group Inc. (GS), the world’s most profitable securities firm before the financial crisis, said it’s under investigation by regulators probing the potential manipulation of foreign-exchange rates. Currencies and commodities were added to a list of financial products and related activities that are subject to investigation, according to a regulatory filing published by the New York-based company today. The filing also added options trading and technology systems and controls to the list. Investigators are looking at the firm’s “trading activities and communications in connection with the establishment of benchmark rates,” Goldman Sachs said in the filing. The company “is cooperating with all such regulatory investigations and reviews.” At least eight banks including Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) have said they’re being investigated by authorities examining the $5.3 trillion-a-day foreign-exchange market and are cooperating. Citigroup, JPMorgan and Barclays Plc (BARC) have suspended or put on leave some of their most senior currency traders amid the inquiry. No one has been accused of wrongdoing. The U.S. Federal Reserve is examining legal and regulatory exemptions that have allowed banks including Goldman Sachs to trade and own raw materials such as oil, coal and metals, a person with knowledge of the matter said last month.
Investment banks and other Wall Street institutions have come under much pressure since the financial crisis of 2008. What is interesting about this case is that the interbank Forex market is unregulated per se, it's an over the counter market where banks trade with each other according to their own rules. By seeing client order flow, banks have an unfair advantage into the market. One example is bank A sees a big order coming through, let's say to sell 1 Billion Euro. Bank A calls his friend at Bank B and tells him about the order. Bank B then places a smaller order for their own book, knowing the price will move when the 1 Billion order hits the market (and may have to be split up in multiple orders). It's very difficult to prove such activities without seeing the communications between Bank A and Bank B, which may be revealed during the course of this investigation. Also it will be interesting to see what legal grounds are taken against the banks. In the stock market, insider trading has been illegal for a long time. But there isn't any specific regulation specifically forbidding banks profiting from information which they have ahead of other market participants. Lawmakers may consider making a Forex specific law, but then it would be questionable how this could be enforced in jurisdictions which are not G8 friendly. Also since Forex is not traded on an exchange, but OTC, this also complicates the enforcement of any potential regulation forbidding such activities. The WM/Reuters rates are used widely to price other instruments, derivatives, and for accounting purposes. Clients who lost money because of these banks activities essentially front running orders and manipulating the price, clearly have a claim against the banks. But what's not clear is what form this claim may take and how it will be prevented from happening in the future.
Updated News Stories about this topic
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Recently Global Intel Hub announced a premium membership for $100/month where premium members can access features such as a raw feed with no spread markup with several participating Forex brokers. Traders who are interested in this can now request a demo environment before signing up.
Global Intel Hub offers a raw feed with no markup, commission, or other hidden cost for Premium members. The spreads are raw interbank spreads with no markup. See some sample spreads below:
Unfortunately, this offer is not available to US Citizens unless they qualify as a ECP.
For more information, please Contact Structured Consulting.