Forex Trading Weekly Forecast - 03.16.09

US Dollar to Extend Losses as Risky Assets Correct Higher

Fundamental Outlook for US Dollar: Bearish

- US Dollar Index Breaks Key Support, Signals Losses Ahead
- Retail Sales Fell Less than Expected in February
- Chinese Premier Questions the Safety of US Assets

US Dollar weakness is set to continue in the coming week as an upward correction in risky assets sends capital out of safe haven assets in search of yield. Last week, the US Dollar Index conclusively broke below a rising trend line that had guided prices higher since mid-December, opening the door for an extended pullback against the spectrum of major currencies. Indeed, the greenback’s average value against its major counterparts is now -93.7% inversely correlated with the MSCI World Stock Index. The Australian and New Zealand Dollars are likely to be the key beneficiaries once again as lucrative yields at 3.25% and 3.00% attract investors.

Although the economic calendar packs plenty of high-profile releases, traders are unlikely to see anything that has not already been priced into the exchange rate. Manufacturing sentiment is expected to sour once again, core inflation metrics are set to continue inching lower, and the rate decision from the Federal Reserve has no room to surprise with rates effectively at nil already. None of these developments add anything new to the established landscape and are unlikely to stir significant volatility across the forex markets. The statement accompanying the rate announcement seems to pack less punch than usual as well considering Ben Bernanke and company are already throwing the monetary policy equivalent of everything but the kitchen sink at borrowing costs.

The weekend’s G20 summit presents a wildcard. Yesterday, Chinese premier Wen Jiabao bluntly questioned the security of US assets, saying American lawmakers need to “ensure” their safety and musing that “We have lent a huge amount of money to the United States… of course we are concerned about the safety of our assets. To be honest, I am a little bit worried.” The Chinese government has little reason to want to talk down the US Dollar because the comparatively cheaper Yuan helps support an already suffering export sector, so Wen’s comments should not be taken lightly. If this kind of rhetoric sees any significant traction at the G20 meeting, the greenback’s correction may prove significantly deeper than otherwise expected.

Euro Forecast Unclear on Euro Zone Fears, Financial Conditions

Fundamental Outlook for Euro This Week: Bearish

- Euro gains slow on weak retail sales data
- Improved investor sentiment nonetheless improves euro outlook
- Euro nears a technical breakout

The euro finished at multi-week highs against the US Dollar, as a week-long rally in the S&P 500 hurt the safe-haven US currency. The short-term correlation between the EUR/USD and the S&P remains near record-highs, and recent trends imply that further stock market gains would lead to Euro strength. Wave after wave of bearish European economic data nonetheless limits optimism for the heavily-traded EMU currency. Fresh economic distress highlights structural risks to the Euro Zone, and FX markets will keep a close eye on developments through the weekend’s G20 summit.

Traders await the conclusions from contentious meetings likely to take place among global economic leaders. US officials have clearly stated their desire for an aggressive global response to the economic and financial crises, but their European counterparts have shown clear resistance to matching sizeable US fiscal and monetary stimuli. Fears of snowballing fiscal deficits and the terms of EU membership prohibit many members from aggressive public spending, and this may in fact leave the Euro Zone at a disadvantage. Furthermore, the European Central Bank seemingly lacks the power to enact similarly aggressive monetary policy. These two key limitations suggest that the US may enjoy more favorable conditions for eventual economic recovery. The risks of EMU and ECB inaction on domestic financial and economic crises continue to mount, and the euro could potentially suffer against the US dollar through the medium term as a result.

Through the shorter-term, traders will keep a close eye out for the coming week’s key European inflation and investor confidence results. Analysts predict that Euro Zone Consumer Price Index inflation picked up through the month of February. Such results could further handicap the European Central Bank’s ability to boost domestic economic prospects. Unless we see real risks of deflation, the ECB is unlikely to drop interest rates far beyond current levels. Otherwise, surprises in upcoming German ZEW figures could elicit responses in financial markets and—by extension—the euro itself. Given that the EUR/USD continues to trade almost tick-for-tick with global stock indices, it will be critical to watch whether the S&P 500’s recent recovery leads to further short-term gains.

Japanese Yen Could Fall on Intervention Concerns Amid G-20, BOJ Meetings

Fundamental Outlook for Japanese Yen: Bearish

- Swiss National Bank’s intervention spurs speculation of Bank of Japan intervention in JPY
- Japan posts first current account deficit in 13 years as exports fall 46.3% from a year ago
- Japanese machine orders plunge a record 39.5% in January from a year ago

The Japanese yen ended the past week off on a mixed note, as the currency gained versus the US dollar, British pound, and Swiss franc but fell against the Canadian dollar, euro, Australian dollar, and New Zealand dollar. While much of this had to do with a resurgence in risk appetite, as evidenced by the 9 percent rise in the Dow Jones Industrial Average from the March 6 close through the March 13 close, we also have to consider renewed prospects of currency intervention. This was brought back to the forefront by the Swiss National Bank, who said on March 12 that they would work to prevent any further appreciation of the Swiss franc against the euro.

The situation in Switzerland is very similar to that of Japan, as exporters have been hurt by the gains in their national currencies against the currencies of their biggest trading partners. For Japan, this refers specifically to China and the US, which are the top two importers of Japanese goods (according to the CIA World Factbook), as the Japanese yen has gained over 9 percent against both the Chinese yuan and US dollar over the past 6 months. Japanese officials have cited concerns about the yen’s appreciation in the past, but they have yet to move toward hard-lined verbal intervention, let alone physical intervention. With the G-20 meeting over the weekend, there is potential for discussion of currencies to occur, and if this is actually written into the final communiqué, the yen could pull back sharply.

However, that is not the only piece of event risk looming on the horizon for the Japanese yen. The Bank of Japan is expected to announce late on March 17 that they have left their target rate unchanged at 0.10 percent, but the release of the Bank’s monthly report at 01:00 ET on March 18 should provide more information on their view of economic conditions. Over the past few months, the BOJ’s report has reflected consistently worse economic assessments, and this may continue to be the case as the higher value of the Japanese yen takes a toll on the country’s export industry. Given the mounting speculation over the potential for Japanese currency intervention, there is also a risk that we could see such an announcement with this central bank meeting, which would likely drive the Japanese yen lower. However, if the markets ultimately find that neither the G-20 nor the BOJ even mention currencies, the Japanese yen could see a bit of a boost by the end of the next week.

British Pound Traders Focus On Policy As 23-Year Lows Loom

Fundamental Outlook for British Pound: Bullish

- The Bank of England kicks off its quantitative easing effort with a successful 10.5 billion pound purchase
- Industrial production shrinks the most in 28 years as the global recession weighs heavily on the United Kingdom
- UK Finance Minister Alistair Darling takes world’s policy officials to task to stabilize world’s markets and economy

The British pound has recovered some ground against the benchmark dollar; but not enough to put it out of harms way next week. In fact, the GBPUSD pair is just a few hundred pips off a long-term triple bottom that spans all the way back to 1985; and few would disagree that the sterling’s long-term trend is bearish. Clearly technical traders are deferring to fundamentals to make a decision on direction as the ultimate move the market makes could redefine the long-term trend. The week ahead holds critical fundamental influence; and could therefore catalyze the break pound traders have been waiting for.

Redefining a trend is not the job of a single indicator or a shift in market sentiment. To put the pound into multi-decade lows or in a true bullish reversal we will need to see the fog surrounding financial and economic fears lift. Market health is a genuine global phenomenon now; and the advantages of one economy’s investments versus another is largely based on the health of the economy. Considering the market consensus for the UK through 2009, this is a bad position to be in. The IMF has projected the UK’s 2009 recession would be the worst in the industrialized world. However, large institutions are often the last to come to such realizations; and the market has already priced in what may be the worst of the dour forecast. In fact, the pound may be oversold as the market has lowered its expectations relative to the UK’s counterparts. Over the past months, the government has made aggressive strides to correct its deep slump. Quantitative easing, nationalization and large stimulus funds speak to officials commitment to genuinely turning the economy around. This contrasts the Euro Zone’s inability to come to region-wide solutions or Japan’s political problems in passing necessary aid. This means that one of the biggest hurdles to the pound’s rebound is sentiment. Should the G20 meeting this weekend end with little in the way of global results, a case-by-case evaluation of economic potential may find the UK in good light.

While a lot rides on the UK’s future relative to its global counterparts, an active economic docket will ensure that news and policy in other economies won’t be the only driver for pound price action. The top event risk for the coming week lies in Wednesday’s combined release of the BoE minutes and employment data. The government’s assessment of economic activity will almost certainly be dim especially with Government King sounding so glum recently. However, the employment numbers are less objective and will give a genuine benchmark for growth potential through the first half of the year. Steady job losses will equate to a drop in consumer spending and therefore, deeper contraction in economic activity. The other notable releases for the week will be the Rightmove House Prices indicator and public lending figures. Both have an obvious influence on growth forecasts; but they will further offer a loose measure of credit activity – an essential gauge for an economy that is already relegated to the worst of the economic recession and financial crisis.

Written by Ilya Spivak, David Rodriguez, John Kicklighter, Terri Belkas, John Rivera and David Song, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 03.16.09
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.

The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.


List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!