Forex Trading Could Upset the EUR/USD Curve
There seems to be an agreement between the European Central Bank (ECB) and European governments that the EUR/USD will move upwards. The common understanding is that the EUR/USD is the currency that investors will turn to for safe investments. And it makes sense to them, because the European Central Bank is printing its own money and is making the Euro more valuable on the international market. This is all happening as the Commodity Futures Trading Commission (CFTC) and the US Commodity Trading Commission (USC) are considering new rules for the traded commodities market.
Perhaps a better name for the Commission might be „futures trading commission“. If you want to play in the forex markets, then you need to know what these rules will do to you. The CFTC does not like to talk about futures, which is a shame, because this is a very important market where speculation is used to drive the prices up and down. The more that the speculators intervene in the market, the lower the price can go. And, as it happens with any market, the more that you can manipulate the market, the higher your risk of losing money.
One of the features of the CFTC’s new proposal is that all trading activities will have to be halted for a set time. For example, all traders will have to stop trading for three hours on Friday evening before the market opens for the weekend. The purpose is to reduce the number of successful trading activities, and thus the number of successful trades. The CFTC also proposes to limit the maximum percentage that any single trader can spend on any one commodity at any one time. Although, again, this will affect the volume, but many CFTC members will see this as a positive step forward in the market, since smaller trading frequency means less chance of trading success.
If you look at the history of the forex trading, you will see that it is characterized by sharp price changes. And, if you follow the trends in the bond market, you will observe that the EUR/USD edges higher, as bond yields fall and bond prices rise. In this sense, by limiting trading activity and mandating a halt to all trading activities for a set period, the CFTC can control currency trading more effectively. In addition, this measure, if combined with their other proposals, may help to stabilize the market.
At the same time, even though traders will lose money when trading in the EUR/USD, they will also profit from trading in other currencies. Traders are always able to make some profit from other currencies by buying or selling them at low rates. This is the beauty of spread trading. Spread trading allows you to enter and exit the market at high rates and makes money both when the spreads are small and large.
Of course, not all of these CFTC proposals will gain approval. The CFTC has proposed three different measures which it is considering doing. One is the Limiting Trading Area proposal. The second is the Proposal to Change the Basis of Pricing for Forex Products. And third is the Annual Percentage Yield Guarantee (APYG) for Forex products. These three proposals are designed to limit trading activity and make the market more efficient.
By limiting trading activities, the CFTC would be able to increase its order count. This would result in more liquidity and higher rates. Also, this proposal suggests that clearinghouses that originate and settle customer orders would be subject to greater review by the CFTC. In other words, clearinghouses would be regulated much more strictly. The last proposal may sound like an odd idea: to add a percentage to the yield on a floating market index. This percentage, however, is a technical implementation designed to stabilize the Euro and the US dollar and would not have an effect on the Euro/USD currency rate.
It should be noted that the proposal calls for a seven-day period between the submission of this plan and the implementation of the measure. During this time, no trading activity would be conducted during the CFTC’s business hours. If trading activity begins during the opening of trading on the Market, then this measure would be rendered useless. For now, it is believed that the proposal will go into effect at the end of August, when the European Commission meets for their meeting in Paris.