Investing

Today, I'm going to take a break from covering the credit crisis in order to cover an important logistical topic: how should one go about choosing a forex broker? There are dozens (if not hundreds) of retail forex brokers, a fact which can be overwhelming to those considering dabbling in forex for the first time. The first step is to assess the quality of the broker, itself. Where is it registered? Those based in offshore tax havens should be treated with some degree of skepticism, as they are subject to lax, if any, regulation. It could be difficult to withdraw funds from an account held with such a broker. Along the same lines, what is the broker's reputation?

One of the advantages of trading currencies (compared to other types of securities) is that forex markets operate continuously from 6PM (US Eastern time) Sunday to 4PM Friday. However, some traders may find this overwhelming. After all, if the markets never close, how should one decide when to trade?

Forex Capital Markets (FXCM) recently unveiled a new offering aimed specifically at retail forex traders interested in trading small lots of forex. The new type of account is appropriately termed "FXCM Micro," and can be funded with as little as $25. It will feature extremely tight spreads- as little as .015%- and automatic execution. By its own admission, FXCM is only able to offer such a competitive product because it maintains extremely low overhead and support costs. The product is quickly gaining notoriety, and 15,000 accounts have already been opened. Those wishing to dip their feet into the pool of forex without wetting their entire bodies should take note.

Read More: FXCM Micro

The Carry Trade is one of the simplest strategies in forex, and if executed correctly, can also be one of the most profitable. The basic mechanics of a carry trade involve borrowing in one currency that offers a low interest rate, and selling it in favor of a higher-yielding currency, in order to capture the interest rate spread. This strategy carries two key risks. The first risk is that the "long" currency will depreciate. This also includes country risk, the possibility that political or macroeconomic instability will adversely affect the long currency. Then, there is the risk that the interest rate differential will change such that the spread shrinks, and a smaller carry is earned.

In a recent article for Seeking Alpha, financial journalist Ray Hendon offered an overview on the four principal strategies employed in the forex markets: carry trade, technical trade, fundamental trade, and arbitrage. The carry trade, which involves borrowing in a low-interest rate currency and buying a higher-yielding currency, can be undertaken by either buying ETF(s) or by trading directly using a retail forex account. The ETF route can be further subdivided into two possibilities: to buy a particular currency ETF to take advantage of the spread, or instead to buy one of two ETFs (symbols: ICI & DBV) that use computer models to mimic the carry trade.

WisdomTree and Dreyfus Funds recently unveiled five new currency ETFs in order to fill a broad gap in the emerging markets category. Previously, investors were limited to such mainstay currencies as the US Dollar, Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, and Swiss Franc. These new ETFs will expand this list to include the Indian Rupee, Brazilian Real, and the much-anticipated Chinese Yuan. It will also offer products for the Euro and Yen, but these probably won't draw much attention. The RMB ETF, especially, will be pounced on by investors, who have been clamoring for years for a cheap and easy way to capture the upside of the Yuan's inevitable appreciation.

In recent months, the credit crunch has ignited a global trend towards risk aversion.  As a result, a correlation has developed between equities, which serve as a proxy for risk, and certain currencies.  The Forex Blog previously covered the link between the S&P 500 and the Japanese Yen, whereby the Japanese Yen moved inversely with the S&P as a decline in  risk appetite led carry traders to unwind their positions.

Through its trademark iPATH line of funds, Barclays Bank recently introduced a new ETN designed to mimic the carry trade.  In accordance with this strategy, this note is linked to  the performance of the Barclays Intelligent Carry Index, which aims sell low-yielding currencies and use the proceeds to invest in those that offer higher yields.  This index holds varying combinations of the so-called G10 currencies, which includes all of the majors as well as the Norwegian Krona and Swedish Krona.  Traditionally, carry traders have sold one specific currency (i.e.