COSMIC:  There are two methods for trading currency:  Currency Futures and ForeX.  There is raging competition between Futures and ForeX brokers for your account.  Right now, it is our opinion that it's not as cost effective to trade ForeX with multiple pip spreads entry fees as it is to trade Futures with very low [$5] commissions. ForeX brokers advertise:  "No Commission Trades."  Why would they need to charge you a commission when they can scalp you for $60 to $100 on the spread for each ForeX contract entered? 

This is what we do:  We concentrate on what we believe to be the most straight forward, least confusing, markets. Our mentor concentrates on trading what he considers to be the best trending currency or index future... Generally, at the present, the Euro Future contract appears to offer the best volatility.

With the U.S. Dollar taken off the Gold Standard in 1971 by President Nixon and continuing development of a global economy, there has been a significant increase in foreign exchange activity and risk.  Foreign exchange risk is the chance of loss due to changes in the relative value of world currencies.  For example, if a U.S. investor buys a foreign security for a company based in a BRIC Country [ Brazil , Russia , India or China ], he in essence buys the exchange rate between the two countries. 

Remember, the exchange rate fluctuates daily.  A small fluctuation in the exchange rate can have a major impact on portfolios. For example, a portfolio holding a million units of foreign exchange will fluctuate by $12,500 for every one cent [1 digit to right of decimal point] fluctuation in the cross rate.  We trade on the 4^th digit to right of decimal. The Euro Future point value = $12.50, so 10 points equal $125.00, 100 points = $1,250 and 1000 points = $12,500. 

A Portfolio manager’s major concern is foreign exchange economic exposure.  This concern has led to the increase in spot and futures currency volume.  The spot rate is the current price of the foreign currency.  The future rate is the contractual rate between a commercial bank and a client for future delivery of foreign exchange.   Future rates or forward exchange rates are traded on the basis of one, two, three, six, and twelve months, with the major currencies extending out as much as 5 years. 

The current value of the futures contract is an unbiased prediction of the future value of the spot rate.  When trading foreign currencies, it is important to pay close attention to the policy makers for each country.  For example if a trader wants to trade the Euro Currency, then he or she would need to recognize key fundamental data being released within the European Union Central Bank [ECB] and, in particular, what Jean-Claude Trichet [Europe’s equivalent of Mr. Bernake, Chairman of the FOMC] says or does.  As with any product, when the supply increases, the price of that product decreases and if supply decreases, the price of that product increases.  The price of money is the interest rate that lenders charge borrowers.  Therefore, if the U. S. Federal Reserve Board, led by Ben Bernake, changes key interest rates, the price of money must change also.

Key Terms:

Interest Rate Parity – the difference in national interest rates will be reflected in the currency futures market.  If there are no transaction cost differentials, two securities with similar risk and expirations will portray a difference in their interest rates equal to the forward premium or discount, but with the opposite sign, Interest Rate Parity

Purchasing Power Parity – In a world of perfect markets, the same good should sell for the same price in different countries.  If there are no barriers to trade, no taxes, or other costs, for example the one troy ounce of gold should be worth the same in the U.S. as it is in Germany .  Purchasing Power Parity

Big Mac Index - The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.  Big Mac Index.

Fisher Effect – Fisher Hypothesis

Become familiar with the world’s currencies. 
There are too many to name; however, we need only watch 6 dollar based currencies:  
Aussie, Canadian, Euro, Pound, Swiss Franc and Yen.  
The Euro is the “in” currency future to trade!

At this writing, late June 2008, the U.S. Dollar Future is
approaching 74.0 coming off 3 months of strong support. 
With the Euro down from its April 1.60 highs, this is a major inflection.
From here on, the Dollar may take on strength.  

Richard V Rueb

DISCLOSURE: The High Degree of Leverage Often Obtainable in Commodity Trading Can Work against You As well As for You. Use of Leverage Can Lead To Large Losses As Well As Gains.