A Tax on Forex Trading ? and forex trading futures

A Tax on Forex Trading ? and forex trading futures the Forex reported that Brazil is considering a forex tax on capital inflows as a way of discourage the inflow of speculative capital that is causing the Real to appreciate. It turns out that Brazil is not alone; England and France, among others, are also mulling taxes on forex transactions. Their goal is not necessarily to discourage capital inflows, but rather to raise money to fund projects that would otherwise not be viable under current budgetary conditions. The UK “levy would raise $30bn-$50bn a year - enough to double spending on health in low-income countries.” The French plan, meanwhile, would “involve taking 0.005% of the proceeds of currency transactions, perhaps on a voluntary basis, to benefit global aid projects.”

While Brazil and England/France appear to be pursuing different ends, together their plans capture the idea behind the “Tobin Tax.” Originally proposed by Nobel Laureate James Tobin after President Nixon declared the end of the gold standard, the tax would be levied on all forex transactions with the proceeds deposited in forex stability funds. One of the most popular versions would only impose the tax during periods of volatility (i.e. speculation) so as not to punish those exchanging currency for “mundane” reasons.

Tobin Tax on Forex Trading While still a fringe idea, the tax initially gained momentum following the 1997 Southeast Asian economic crisis, and has found new followers in the wake of the ongoing credit crisis. Consider the unprecedented volatility in currency markets of late, manifested in wild daily fluctuations.

2009 Forex Volatility Even the US Dollar, the world’s reserve currency, has been on a veritable roller coaster of late, rising and falling by 10% in a matter of months. Prior to the rise of forex speculation ( already a $1 Quadrillion/year market! ), it was rare for a currency to move that much in a year. Given that such speculation probably accounts for 90% of daily turnover, it seems obvious as to who is causing this volatility.

USDX Dollar IndexDon’t get me wrong; there’s a role for speculation in the forex markets , just like there’s a role for speculation in all securities markets. When markets function efficiently and players act rationally, currences should and will reflect economic fundamentals and act to minimize global imbalances. Due to the rise of the carry trade and the herd mentality, however, the oppose often obtains in practice. This can cause currency runs and or artificially inflated currencies that compel Central Banks to act counter to the way they otherwise would (i.e. by raising interest rates rapidly to deter capital flight, crimping economic growth.)

A Tobin tax would work both to minimize speculation in the short-term (by taxing trades) and promote stability in the long-term (by providing Central Banks with funds that they can use to fight speculative “attacks.” Besides, given that forex traders already enjoy favorable tax treatment - i.e. taxed below the short-term speculative rate - it wouldn’t be the end of forex trading as we know it.

Japanese Yen Sinks with US Dollar, but at Slower Pace

Japanese Yen Sinks with US Dollar, but at Slower Pace . Speaking of seven-month lows, did anyone notice that while the US Dollar was busy declining against pretty much every other tradable currency that the Japanese Yen was doing the same? The Yen has remained rangebound against the Dollar for the last three months - the period during which the market rally and Dollar decline have taken place - which just by simple mathematics explains why it has also fallen to a seven-month low around the same time.

The same set of factors that caused the Yen and Dollar to move in lockstep prior to the credit crisis seems to have coalesced again in March. Specifically, investor comfort with risk-taking have combined with low rates to make both very attractive candidates for carry trade funding currencies.

Both countries’ Central Banks are holding rates close to 0% (for several years now, in the case of Japan) and appear unlikely to hike them anytime soon. Simply put, ” ‘Risk appetite is improving in the market, which has been attracting cash away from safe-haven currencies like the dollar’ and the yen. Investors are ‘searching for higher yields.’ ”

At the same time, both countries have been aggressive in using fiscal and monetary policy to tackle the economic downturn, both of which could be highly inflationary and lead to currency debasement. Then, again, nearly every economy has responded with the same policy measures, which suggests that low interest rates represent the most plausible factor.

It could, however, explain why the Yen is rising against the Dollar, and is closing in on the 13-year high recorded earlier this year. In other words, while both currencies are being sold in the short-term to fund carry trades, investors may have determined that the Dollar will remain weaker in the long-term, due to inflation problems.

On a certain level, this is somewhat baffling. Japanese economic indicators make the US economic recession look like an economic boom by comparison. “Preliminary figures showed the world’s second-largest economy shrank at a record 15.2 percent annual pace last quarter,” which would be the worst on record. Meanwhile, Japanese corporations saw so-called recurring profits fall by “69.0 percent from a year earlier to 4.27 trillion yen (44.35 billion dollars) in the three months to March…the sharpest drop since comparable figures became available in 1955 and the seventh straight quarter of declines…Combined sales reported by corporate Japan both at home and abroad caved by a record 20.4 percent.”

In addition, the US has recorded a net capital account surplus with Japan of late, which implies that Japanese are net investors in the US- not the other way around. The government of Japan is equally confused, and is “in the middle of analyzing what is driving the yen higher.” Still, it insists that forex intervention is not currently on the table. If Japan’s economy contracts by another 15% next quarter, however, I wouldn’t be surprised if it did an about-face.

Chinese Yuan Inches Towards Reserve Currency Status

Forex trading online news Chinese Yuan Inches Towards Reserve Currency Status. The last week brought a few more developments in China’s quest to turn the Yuan into a viable reserve currency. Don’t get me wrong - I used the term “inches” in the title of this post for a reason - the Yuan will not supplant the Dollar anytime soon, if ever. Still, China deserves credit for their resolve on forcing the issue, as well as for providing an alternative to the Dollar monopoly.

An important boost came from Russia’s Finance Minster, who suggested that, “This could take 10 years but after that the yuan would be in demand and it is the shortest route to the creation of a new world reserve currency,” as long as it was accompanied by economic and exchange rate liberalization. The Head of the World Bank, Robert Zoellick, agreed: “Ultimately, that’s a good thing. And ultimately it’s good if you’ve got, I think, some multipolarity of reserve currencies to create, to make sure that people manage them well.”

These soft endorsements were precipitated by comments from a top Chinese banker that companies should start to issue bonds denominated in Yuan. “Guo Shuqing, the chairman of state-controlled China Construction Bank (CCB), also said he is exploring the possibility of issuing loans to trading companies in yuan, allowing Chinese and foreign companies to settle their bills in yuan rather than in dollars.” This would serve two ends simultaneously; not only would Chinese capital markets be strengthened, but the Chinese Yuan would benefit from the increased exposure. Already, “HSBC and Standard Chartered have both said they are preparing to issue bonds denominated in yuan” and international monetary institutions might not be far behind.

Conspiracies aside, the Chinese Yuan will become a reserve currency when it is ready to become a reserve currency. I’m sure this seems self-evident, but it’s important for China (and China watchers) not to get ahead of itself.

It doesn’t make sense for risk-averse investors to hold a currency that is still essentially pegged to the US Dollar and that isn’t fully convertible. If there’s no pretense that the Yuan fluctuates in accordance with market forces, and if investors aren’t guaranteed the ability to withdraw RMB if need be, what possible reason would they have to hold it in the first place?

Summarizes one columnist, “China would have to gradually make the yuan convertible on the capital account; it needed a more liquid foreign exchange market; its bond markets and banking system needed to be more developed; and there had to be proper monitoring of cross-border capital flows.” The importance of having functioning capital markets cannot be understated. Simply, investors and Central Banks buying Yuan would not want to simply invest in paper currency; instead they would want stocks and bonds that trade transparently.

Currently, foreign investors are limited to savings accounts and investing/lending to firms that record earnings opaquely and are ultimately subject to the whims of the Central government. This system has functioned well in the past, only because investors were betting generally on the Yuan’s appreciation, and not necessarily on specific opportunities within China. If China wants the Yuan to be a serious contender with the Dollar, it needs to give investors more and better options. Ironically, if China had taken these steps in the past, it wouldn’t have found itself with $2 Trillion worth of Dollar assets that it is desperately trying to dispose of.

Pick of the Day: USDJPY - Close Open Orders

Good evening! It looks like USDJPY did not go my way as the pair broke out to the upside. I have decided to close my entry orders, especially as we head into US jobs data.
Close open orders. No trade.
US employment data often causes fast market action and spreads to widen, so please be very cautious executing trades around its release time. For newbies, it is often best to stay away until you gain more experience.
Market expectations are for another 500k+ jobs lost. While the headline number is important, the revisions can be just as market moving.

Good morning! I've spotted a nice little chart pattern on USDJPY the may lead to a breakout opportunity. Will we see volatility once again before the end of the week?
That may be the case as price action in USDJPY has been consolidating over the past few days, forming a symmetrical triangle. This chart pattern often is a signal of a potential breakout as traders wait on the sidelines and will potentially re-enter the market after a significant event.
And what could that event be you ask? US employment data this Friday!
Yes, the big dog of economic events is out this Friday, and after seeing ADP Payrolls report 532k jobs in the private sector cut this morning, we may see another disappointing number and continued rise in unemployment rates in the US. This outcome could bring about a new round of risk aversion. Couple that with some profit taking after the monstrous runs we've seen in risk appetites, this could lead to a breakout lower in USDJPY.
If this does take place, I look to short below the rising trendline drawn on the chart and below that area of minor consolidation. We may see some minor support at the areas drawn with the blue line, around 94.50, but I am going to target 94.00 and beyond. Here's what I am going to do:
Short USDJPY at 95.25, stop at 96.50, pt1 at 94.00, pt2 at 92.50
Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly.
If my orders have not been triggered by the time we do see NFP data on Friday, I may remove my orders to avoid slippage that fast market conditions can bring. Stay tuned!

US Dollar further gains

The US Dollar lastly indicated marks of an important revival and probable bottom in opposition to the Euro and other major currencies on an evidently action-packed week of trading. Better than anticipated, Non Farm Payrolls outcomes and a comparatively stable flow of positive economic blows caused a lot of enthusiastic analysts to state that the economic catastrophe is done, but most likely, this kind of statement is exaggerated. Non-Farm Payrolls went down considerably less than anticipated in May and at the slowest rate in 8 months, but some viewpoint is noticeably in order.

Forex news Since the beginning of the economic slump in December, 2007, US unemployment figures have gone up by an shocking 7.0 million—undoubtedly the worst decline since the Second World War A marginal boost in the labor market participation rate the same pushed the headline jobless rate to a quarter-century high of 9.4 %