Profiles of the major currency pairs and the factors that influence them the most

Expert: Dan Blystone, Founder at TradersLog.com

Topics to be covered during the session:

• Characteristics of each of the major currency pairs
• Monetary Policy
• Economic Overview

Who is Dan Blystone?
Dan Blystone is founder of TradersLog.com - a website that focuses on technical and fundamental analysis of the financial markets, and also features a forum and chatroom. Originally from London and now based in Chicago, Dan was previously a professional futures trader. He worked on the floor of the Chicago Mercantile Exchange in the currencies and the S&P pit, later traded Eurex's bund futures, and most recently traded the US 10 year note futures. Having also worked at ABN AMRO's interbank desk in Chicago, Dan has a keen interest in the world of forex trading and has enjoyed working with FXStreet.com over the past year.

Summary:
A look at the background of the currency pairs you trade and how this information can help you improve your trade selection. We will look at the fundamental economic factors that most influence the price movement of the majors.

Speech Material:

FXstreet Moderator (Sep 25, 2006 11:47:21 AM)
Welcome to the Session. Today I am delighted to welcome our guest speaker Dan Blystone, Founder at TradersLog.com

Dan Blystone (Sep 25, 2006 11:47:35 AM)
Thank you

Dan Blystone (Sep 25, 2006 11:49:04 AM)
Welcome to our FXStreet Q&A session today! I hope you all had a great weekend.

Dan Blystone (Sep 25, 2006 11:49:42 AM)
Today I am going to begin a disussion of the backgrounds of the major currencies

Dan Blystone (Sep 25, 2006 11:50:03 AM)
and the factors that influence them and their price movements

Dan Blystone (Sep 25, 2006 11:50:27 AM)
we will begin with the greenback - the US Dollar

Dan Blystone (Sep 25, 2006 11:51:01 AM)
you can refer to the following page on my website for a summary of todays presentation:

Dan Blystone (Sep 25, 2006 11:51:24 AM)
http://www.traderslog.com/profile-majors.htm

Dan Blystone (Sep 25, 2006 11:51:43 AM)
Lets begin with our discussion of the USD

Dan Blystone (Sep 25, 2006 11:51:55 AM)
The United States has the worlds largest national economy.

Dan Blystone (Sep 25, 2006 11:52:07 AM)
Gross Domestic Product (GDP) for 2005 was valued at 12.42 trillion dollars.

Dan Blystone (Sep 25, 2006 11:52:16 AM)
The major sectors that make up US GDP are services (79.4%), industry (19.7%), agriculture (0.9%).

Dan Blystone (Sep 25, 2006 11:52:36 AM)
The highly liquid US equity and fixed income markets have increasingly attracted foreign investors.

Dan Blystone (Sep 25, 2006 11:52:52 AM)
This is bullish for the dollar

Dan Blystone (Sep 25, 2006 11:53:04 AM)
However, if foreign investors withdraw their US investments to seek better returns elsewhere, this will cause a drop in the value of the USD.

Dan Blystone (Sep 25, 2006 11:53:15 AM)
The US has the highest volume of imports and exports in the world.

Dan Blystone (Sep 25, 2006 11:53:23 AM)
The principle US export partners are Canada 24%, Mexico 14%, Japan 7%.

Dan Blystone (Sep 25, 2006 11:53:33 AM)
The principle US import partners are Canada 20%, Mainland China 15%, Mexico 10%, Japan 9%, Germany 5%.

Dan Blystone (Sep 25, 2006 11:53:56 AM)
Currently the US is experiencing a very large current account deficit.

Dan Blystone (Sep 25, 2006 11:54:07 AM)
Funding the deficit has become a larger problem as foreign reserve banks consider exchanging dollar reserve assets for euros.

Dan Blystone (Sep 25, 2006 11:54:44 AM)
Some analysts see this among the reasons that the euro may be only beginning its ascent in value

Dan Blystone (Sep 25, 2006 11:54:51 AM)
vs the dollar

Dan Blystone (Sep 25, 2006 11:55:01 AM)
The US represents approximately 20% of world trade.

Dan Blystone (Sep 25, 2006 11:55:12 AM)
A weaker dollar could boost exports and a stronger dollar may stiffle demand for US exports.

Dan Blystone (Sep 25, 2006 11:55:42 AM)
Lets move on now to Monetary Policy

Dan Blystone (Sep 25, 2006 11:56:06 AM)
The US Central Bank, theFederal Reserve (Fed) sets the monetary policy for the US and makes decisions through the Federal Open Market Committee (FOMC).

Dan Blystone (Sep 25, 2006 11:56:20 AM)
Current Members are:

Dan Blystone (Sep 25, 2006 11:56:28 AM)
* Ben Bernanke, Board of Governors, Chairman * Timothy F. Geithner, New York, Vice Chairman * Susan Schmidt Bies, Board of Governors * Jack Guynn, Atlanta * Randall S. Kroszner, Board of Governors * Donald Kohn, Board of Governors * Jeffrey M. Lacker, Richmond * Frederic S. Mishkin, Board of Governors * Sandra Pianalto, Cleveland * Kevin M. Warsh, Board of Governors * Janet L. Yellen, San Francisco

Dan Blystone (Sep 25, 2006 11:56:42 AM)
The Fed's objective is to contain inflation and encourage long term economic growth.

Dan Blystone (Sep 25, 2006 11:57:00 AM)
To achieve this the Fed uses Open Market Operations and the Fed Funds Rate.

Dan Blystone (Sep 25, 2006 11:57:15 AM)
Open market operations refer to a central bank controling its national money supply by buying and selling government securities, or other instruments.

Dan Blystone (Sep 25, 2006 11:57:34 AM)
The Fed buying government securities raises bond prices and decreases interest rates, and the Fed selling government securities does the inverse.

Dan Blystone (Sep 25, 2006 11:58:01 AM)
The federal funds rate is the most important interest rate and refers to the rate at which depository institutions lend balances to each other for overnight loans.

Dan Blystone (Sep 25, 2006 11:58:18 AM)
The Fed increases this rate in order to contain inflation, or decrease it to stimulate growth.

Dan Blystone (Sep 25, 2006 11:58:33 AM)
The USD in the Forex Market

Dan Blystone (Sep 25, 2006 11:58:43 AM)
Over 90% of currency deals include the dollar.

Dan Blystone (Sep 25, 2006 11:58:56 AM)
The most liquid currency pairs all include the dollar: eur/usd, usd/jpy, gbp/usd and usd/chf.

Dan Blystone (Sep 25, 2006 11:59:13 AM)
The USD has an inverse relationship with Gold.

Dan Blystone (Sep 25, 2006 11:59:27 AM)
One of the major reasons for the rally in gold prices is a result of dollar depreciation stemming from issues of geopolitical instability, notably the attacks of 9/11 2001.

Dan Blystone (Sep 25, 2006 11:59:41 AM)
Prior to 9/11 the USD had a stronger reputation as a safe haven currency.

Dan Blystone (Sep 25, 2006 11:59:58 AM)
Many emerging markets currencies are pegged to the USD.

Dan Blystone (Sep 25, 2006 12:00:15 PM)
Here, the governments agree to buy or sell any amount of their currency at a fixed rate for the reserve currency of US dollars.

Dan Blystone (Sep 25, 2006 12:00:26 PM)
The governments are obliged to hold reserves in dollars at least equal to the amount in circulation.

Dan Blystone (Sep 25, 2006 12:00:39 PM)
As a consequence the central banks of these countries are large holders of US dollars.

Dan Blystone (Sep 25, 2006 12:00:57 PM)
If these central banks diversify their reserves with euros this will have a negative effect on the value of the dollar.

Dan Blystone (Sep 25, 2006 12:01:18 PM)
The difference in bond yields between US and foreign bonds is important to follow.

Dan Blystone (Sep 25, 2006 12:01:47 PM)
Investors are naturally looking for the highest yields, and if for example US yields decline investors will sell their US bonds and buy foreign bonds -

Dan Blystone (Sep 25, 2006 12:01:56 PM)
to do this they will need to sell US dollars and buy the foreign currency which will force the dollar lower.

Dan Blystone (Sep 25, 2006 12:02:19 PM)
The US Dollar Index

Dan Blystone (Sep 25, 2006 12:02:41 PM)
The US Dollar Index (USDX) is a futures contract offered by the New York Board of Trade.

Dan Blystone (Sep 25, 2006 12:02:54 PM)
It is a trade-weighted average of six foreign currencies against the dollar.

Dan Blystone (Sep 25, 2006 12:03:10 PM)
Currently, the index includes euros (EUR), Japanese yen (JPY), British pounds (GBP), Canadian dollars (CAD), Swedish kronas (SEK) and Swiss francs (CHF).

Dan Blystone (Sep 25, 2006 12:03:29 PM)
USDX broadly reflects the dollar's standing compared to the other major currencies of the world.

Dan Blystone (Sep 25, 2006 12:03:47 PM)
It is widely used to hedge risk in the currency markets or to take a position in the US Dollar without having the risk exposure of a single currency pair.

Dan Blystone (Sep 25, 2006 12:04:05 PM)
The US Dollar Index allows the fx trader a feel for what is going on in the currency market globally at a glance.

Dan Blystone (Sep 25, 2006 12:04:17 PM)
If the Dollar Index is trending lower, then it is likely that a major currency that is a component of it is trading higher.

Dan Blystone (Sep 25, 2006 12:04:28 PM)
Relationship of the Financial Markets to the Dollar

Dan Blystone (Sep 25, 2006 12:04:55 PM)
A strong US equities market is bullish for the dollar, as the dollar is bid up by foreigners buying it to participate in the market.

Dan Blystone (Sep 25, 2006 12:05:10 PM)
The Dow 30 has the greatest influence on the dollar, and closest positive correlation.

Dan Blystone (Sep 25, 2006 12:05:19 PM)
High yields in the fixed income market will also attract foreign investment and boost the dollar.

Dan Blystone (Sep 25, 2006 12:05:34 PM)
Cross Rate Effect

Dan Blystone (Sep 25, 2006 12:05:44 PM)
A cross is a curency pair that does not include the dollar.

Dan Blystone (Sep 25, 2006 12:05:54 PM)
The dollar’s value against one currency can be influenced by another currency pair that may not involve the dollar.

Dan Blystone (Sep 25, 2006 12:06:23 PM)
For example, a strong rise in the yen against the euro (falling EUR/JPY) may cause a broad decline in the euro, including a fall in EUR/USD.

Dan Blystone (Sep 25, 2006 12:06:44 PM)
3-month Eurodollar Deposits

Dan Blystone (Sep 25, 2006 12:06:53 PM)
A Eurodollar is a dollar denominated deposit held in a bank outside of the United States.

Dan Blystone (Sep 25, 2006 12:07:05 PM)
The interest rate on 3-month dollar-denominated deposits held in banks outside the US is a valuable benchmark for determining interest rate differentials to help estimate exchange rates.

Dan Blystone (Sep 25, 2006 12:07:31 PM)
Taking for example USD/JPY, the greater the interest rate differential in favor of the eurodollar against the euroyen deposit, the more likely USD/JPY will receive a boost.

Dan Blystone (Sep 25, 2006 12:07:38 PM)
10-year Treasury Note

Dan Blystone (Sep 25, 2006 12:07:54 PM)
FX markets usually refer to the 10-year note when comparing its yield with that on similar bonds abroad such as the Bund - the German 10-year bond, the 10-year JGB in Japan and the 10-year gilt in the UK (10-year gilt).

Dan Blystone (Sep 25, 2006 12:08:13 PM)
The difference in yields between that of the US 10-year Treasury note and that of other bonds impacts the dollar exchange rate.

Dan Blystone (Sep 25, 2006 12:08:19 PM)
A higher US yield usually strengthens the dollar as it attracts international investment.

Dan Blystone (Sep 25, 2006 12:08:47 PM)
Economic Indicators

Dan Blystone (Sep 25, 2006 12:09:07 PM)
The most timely and broad indicator of economic activity and overall economic health is the Employment Report.

Dan Blystone (Sep 25, 2006 12:09:28 PM)
Importance: Highest. Published by: Bureau of Labor Statistics, U.S. Department of Labor. Frequency: Monthly. Release Time: First Friday of the month at 8:30 ET Coverage: Prior Month.

Dan Blystone (Sep 25, 2006 12:09:49 PM)
This is the most important economic indicator. The most closely watched parts of this report are the nonfarm payrolls number and the unemployment rate.

Dan Blystone (Sep 25, 2006 12:10:00 PM)
Market Reaction:

Dan Blystone (Sep 25, 2006 12:10:26 PM)
Payroll Employment Up>Bond Market Down>Stock Market Up>Dollar Up

Dan Blystone (Sep 25, 2006 12:10:50 PM)
Payroll Employment Down>Bond Market Up>Stock Market Down>Dollar Down

Dan Blystone (Sep 25, 2006 12:11:12 PM)
Unemployment Rate Up>Bond Market Up>Stock Market Down>Dollar Down

Dan Blystone (Sep 25, 2006 12:11:37 PM)
Unemployment Rate Down>Bond Market Down>Stock Market Up>Dollar Up

Dan Blystone (Sep 25, 2006 12:11:57 PM)
The most important quarterly release is Gross Domestic Product (GDP)

Dan Blystone (Sep 25, 2006 12:12:12 PM)
- the best overall barometer of economic activity.

Dan Blystone (Sep 25, 2006 12:12:23 PM)
Release Date: Last Day of the Quarter Release Time: 8:30AM EST Coverage: Previous Quarter Released By: Commerce Department

Dan Blystone (Sep 25, 2006 12:12:33 PM)
Market Reaction:

Dan Blystone (Sep 25, 2006 12:12:57 PM)
GDP Up>Bond Market Down>Stock Market Up>Dollar Up

Dan Blystone (Sep 25, 2006 12:13:23 PM)
GDP Down>Bond Market Up>Stock Market Down>Dollar Down

Dan Blystone (Sep 25, 2006 12:13:45 PM)
Moving on

Dan Blystone (Sep 25, 2006 12:13:50 PM)
lets look at CPI

Dan Blystone (Sep 25, 2006 12:13:56 PM)
The Consumer Price Index (CPI) is seen by many as the most important measure of inflation.

Dan Blystone (Sep 25, 2006 12:14:08 PM)
The Consumer Price Index measures the price level of a fixed basket of goods and services purchased at a consumer level.

Dan Blystone (Sep 25, 2006 12:14:15 PM)
This US indicator is closely watched by FX traders because it can cause alot of activity.

Dan Blystone (Sep 25, 2006 12:14:23 PM)
Importance: Moderate Volatility: Moderate Source: Bureau of Labor statistics, U.S. Department of Labor Release Time: 8:30 ET, about the 13th of each month. Coverage: Prior Month. Web: http://stats.bls.gov/news.release/cpi.toc.htm

Dan Blystone (Sep 25, 2006 12:14:59 PM)
CPI Up>Bond Market Down>Stock Market Down>Dollar Uncertain

Dan Blystone (Sep 25, 2006 12:15:27 PM)
CPI Down>Bond Market Up>Stock Market Up>Dollar Uncertain

Dan Blystone (Sep 25, 2006 12:16:15 PM)
and that wraps up todays look at the USD

Dan Blystone (Sep 25, 2006 12:16:38 PM)
I am ready to start taking questions and begin discussion

FXstreet Moderator (Sep 25, 2006 12:20:08 PM)
You can send your questions now. Thank you.

Guest_jvrama (Sep 25, 2006 12:20:24 PM)
Dan!Why do you not include the ISM in this list?Thank You

Dan Blystone (Sep 25, 2006 12:21:32 PM)
hi - I was trying to be concise

Dan Blystone (Sep 25, 2006 12:21:49 PM)
the other important indicators to watch (for the fx trader)

Dan Blystone (Sep 25, 2006 12:22:05 PM)
include: ppi, international trade

Dan Blystone (Sep 25, 2006 12:22:34 PM)
employment cost index, ism (formerly napm)

Dan Blystone (Sep 25, 2006 12:22:54 PM)
industrial production and consumer confidence

Dan Blystone (Sep 25, 2006 12:23:26 PM)
you can find details of all these US indicators on my website here:

Dan Blystone (Sep 25, 2006 12:23:26 PM)
http://www.traderslog.com/fundamentalanalysis.htm

Dan Blystone (Sep 25, 2006 12:24:50 PM)
as I mentioned earlier, the employment report and gdp are the most important indicators

Dan Blystone (Sep 25, 2006 12:26:42 PM)
any more questions are welcome

Silvina (Sep 25, 2006 12:26:57 PM)
could you talk about the impact on the dollar of differences in short vs. long term US bond yields?

Dan Blystone (Sep 25, 2006 12:27:13 PM)
yes,

Dan Blystone (Sep 25, 2006 12:27:33 PM)
the 30 year used to be the benchmark that was most watched

Dan Blystone (Sep 25, 2006 12:27:50 PM)
now the focus is more on the US 10 year note

Dan Blystone (Sep 25, 2006 12:29:55 PM)
seeing some consolidation in the eur today

Dan Blystone (Sep 25, 2006 12:30:16 PM)
please go ahead with any more questions

Guest_Jerry (Sep 25, 2006 12:30:27 PM)
Hi dan - You say the DOW 30 has thi highest equity correlation to te dollar - How does the S&P 500 compare - wouldnr it be more relevant and inclusive?

Dan Blystone (Sep 25, 2006 12:30:39 PM)
hi Jerry

Dan Blystone (Sep 25, 2006 12:31:01 PM)
you would think so, with the S&P being a broader based index

Dan Blystone (Sep 25, 2006 12:31:52 PM)
but historically there has been a stronger positive positive correlation between the dow and the USD

Dan Blystone (Sep 25, 2006 12:33:15 PM)
any more questions welcome, we have 10 minutes left

FXstreet Moderator (Sep 25, 2006 12:33:43 PM)
LAST QUESTION

ali (Sep 25, 2006 12:33:45 PM)
which one has strongest effect on USD in near future: trade deficit, CNY appriciation, ahmadinejad?

Dan Blystone (Sep 25, 2006 12:34:22 PM)
great question

Dan Blystone (Sep 25, 2006 12:34:49 PM)
I would say the trade deficit is an issue that will play itself out over a longer term basis

Dan Blystone (Sep 25, 2006 12:35:25 PM)
the pollitical tension with Iran is something I am watching very closely

Dan Blystone (Sep 25, 2006 12:35:57 PM)
This weeks Time magazine is running a story stating the inevitability of a war with Iran.

Dan Blystone (Sep 25, 2006 12:36:46 PM)
this I think will have the most immediate influence

Dan Blystone (Sep 25, 2006 12:37:05 PM)
on the USD

Dan Blystone (Sep 25, 2006 12:38:23 PM)
If any of you want to contact me for further discussion, I can be reached at webmaster@traderslog.com

FXstreet Moderator (Sep 25, 2006 12:38:36 PM)
That’s all we have time for Today .Thank you very much for that, Dan

Dan Blystone (Sep 25, 2006 12:38:55 PM)
you are welcome, thank you all for attending!

FXstreet Moderator (Sep 25, 2006 12:39:02 PM)
Thank you all for your participation. See you soon!