1. A simple moving average in the middle
2. An upper band (SMA plus 2 standard deviations)
3. A lower band (SMA minus 2 standard deviations)
Standard deviation is a statistical unit of measure that provides a good assessment of a price plot's volatility. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility. Sharp price increases (or decreases), and hence volatility, will lead to a widening of the bands.
For easier understanding, see the following chart: when the price was calm, Bollinger Band lines were close to one another, but when the price jumped up, Bollinger Band lines are spread. The same would happen if the price fell.
Upper = Average + 2*SD = X + 2*σ
Middle = Average = X
Lower = Average - 2*SD = X - 2*σ
The first thing you should know about Bollinger Band is that prices strive to return to the center of the Bollinger Bands. On the following chart you can see that the price has returned back towards the middle of Bollinger Bands.
What you just saw was a classic Bollinger Bounce. The reason why this “bounce” occurs is that Bollinger Band lines act like a level of support and resistance. The larger time period that you observe in the graph (H1, H4, D1), the stronger the Bollinger Bands get. Most traders developed systems that rely on the “jumps”. This strategy is best used when the market is in the range (ranging market) and while there is no clear trend.
When the Bollinger Band lines get close together, it usually means that a break out will appear. If the candlesticks start to break out above the upper Bollinger Band line it is customary that the upward trend will continue, same thing is true for the downward trend.
If you look at the chart above you can see the Bollinger Band lines shrinking. Price is just beginning to penetrate upper Bollinger Bands lines and continues to go up. This is the way a typical Bollinger Squeeze works. This strategy is designed to catch a trend as soon as possible. This situation does not happen every day, but you can probably encounter it several times a week if you observe a 15 minute chart.
The use of Bollinger Bands varies wildly among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band.
When the bands lie close together a period of low volatility in stock price is indicated. When they are far apart a period of high volatility in price is indicated. When the bands have only a slight slope and lie approximately parallel for an extended time the price of a stock will be found to oscillate up and down between the bands as though in a channel.
As always, traders are inclined to use Bollinger Bands with other indicators to see if there is confirmation. In particular, the use of an oscillator like Bollinger Bands will often be coupled with a non-oscillator indicator like chart patterns or a trend line. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater evidence that what the Bands forecast is correct.
Even though Bollinger Bands can help generate buy and sell signals, they are not designed to determine the future direction of a currency. The Bollinger Bands were designed to augment other analysis techniques and indicators. By themselves, Bollinger Bands serve two primary functions:
- To identify periods of high and low volatility
- To identify periods when prices are at extreme, and possibly unsustainable, levels
As stated above, currencies can fluctuate between periods of high volatility and low volatility. Being able to identify a period of low volatility can serve as an alert to monitor the price action of a currency. Other aspects of technical analysis, such as momentum, moving averages and retracements, can then be employed to help determine the direction of the potential breakout.
Remember that buy and sell signals are not given when prices reach the upper or lower Bollinger Bands. Such levels merely indicate that prices are high or low on a relative basis. A currency can become overbought or oversold for an extended period of time. Knowing whether or not prices are high or low on a relative basis can enhance our interpretation of other indicators, and it can assist with timing issues in trading.
USD - Dollar Drops Against the Majors as Equities Rally
The Dollar recorded an extremely volatile day of trading as a variety of factors helped push up the demand for riskier assets, whilst reducing the demand for safe-haven positions. Equity markets in the U.S. rallied as many companies in the U.S. recorded far better-than-expected results. These led to major banking shares, such as Bank of America and Citigroup making remarkable gains yesterday. The market also continued to move on the better-than-expected U.S. consumer confidence figures from Tuesday. The equity market surge and Dollar decline was also owed to Tuesday's impressive U.S. Consumer Confidence figures.
The USD tumbled by more than 130 pips against the EUR in yesterday's trading to close at 133.22. This is much owed to the fall in demand for safe-haven currencies, as it seems that the U.S. recession may be bottoming out. This is despite poor U.S. GDP figures that were released yesterday. The Dollar also made losses against the GBP to end the day down 125 pips at 148.30. However, versus the JPY, the USD finished higher 0.6% or 60 pips as the demand for the safe-haven Yen plummeted in yesterday's trading. This was largely owed to news that the economic situation in Japan, China and the U.S. was starting to improve.
As of today, there are a number of important U.S. economic data releases that are set to be released. The most important of which are the Unemployment Claims, Personal Spending, and Personal Income figures that are set to be released at 12:30 GMT simultaneously. The market is likely to be very volatile on the release of these figures. Additionally, later on today, the market is likely to take into account the poor U.S. GDP figures that were released yesterday. Therefore, the USD may reverse some of the losses that it made yesterday against its major currency crosses as investors may return to the safe-haven Dollar. We could see the EUR/USD trading near the 1.3200 level by the end of the day.
EUR - EUR Soars Versus the USD
The EUR experienced a bullish day of trading yesterday, mainly due to the European Consumer Confidence figures, showing its first month on month rise in 11 months. This added to the news from across the developed economies from the U.S. to Japan that the worst of the global economic recession may be over. The bullish equity markets in the Euro-Zone and in Britain were partly due to that of the U.S., partly due to the upgrade of British banks by brokers, and the fall in demand of safe-haven currencies. The EUR made its most notable gains against the USD in Thursday's trading.
The EUR gained about 130 pips against the Dollar in Wednesday's trading as demand for safe-haven currencies plummeted as the global economy begins to pick up. The pair closed at the 1.3322 level. The EUR/JPY cross rose by an impressive 210 pips to 129.90 as demand for the most safe-haven currency of all as of late plummeted as indicators from Japan showed that her economy had improved in April. Against the Pound, the EUR did make marginal gains as fears of a prolonged European recession dissipated slightly. The pair closed up 15 pips at 0.8980.
Looking ahead to today, the Euro-Zone and Britain are set to publish a number of important data releases. These include the British Nationwide HPI at 6:00 GMT and the Euro-Zone Unemployment Rate at 21:00 GMT. These figures are likely to determine the GBP and EUR's strength going into end of week trading. Forex traders are also advised to closely follow statements coming from U.S. President Barack Obama and the U.S. Federal Reserve, as the forex market is likely to be very volatile to this.
JPY - Yen Plummets as Economy Improves
The Yen plummeted yesterday against its major currency pairs as the current economic recession in the world's second largest economy seems to be bottoming out. The JPY slid over 60 pips Yen to 97.54 Yen per Dollar as the Yen's demise was compounded by strong U.S. consumer confidence figures. Thus the most safe-haven currency as of late plummeted as a result of both improvements in Japan and America's economy. The JPY also slid against the EUR, dropping a massive 210 pips to finish the day's trading at 129.90. The Pound also made inroads into the JPY as the confidence of the U.S. equity markets swept Europe, and reduced demand for the safe-haven JPY.
As the Japanese equity markets reopened yesterday after a bank holiday, shares soared as the global economy showed signs of bottoming out. This is following good U.S. Consumer Confidence figures from Tuesday, European Consumer Confidence figures from yesterday, and positive Japanese data releases on Wednesday. The bearish JPY yesterday was compounded by impressive factory production figures, showing their first increase in 6 months. All these factors helped pour investors away from the Yen and into the riskier equity market. Today, the Household Spending and Unemployment Rate figures are likely to help determine the JPY's strength in late trading. The USD/JPY could break the 98.00 resistance level by the end of today's trading.
Crude Oil - Jumps 4%
The price of Crude Oil ascended by $2 or 4% yesterday to $51.44 a barrel. The increase comes despite the higher-than-forecasted Crude Oil Inventories data release. Much of the black gold's bullishness was owed to the weak Dollar and optimism about a quicker than anticipated global economic recovery. Data coming from the U.S., Japan, China, and the Euro-Zone in the last 2 days helped bring back investors confidence into the equity and commodity markets
As a result of the renewed optimism, investors decided to return to the Crude Oil market. Moreover, the weaker Dollar added to the effects of Crude's gains on Wednesday. What we will now have to see is can Oil maintain this bullish momentum? Maybe in the medium-term this may be possible. However, in the short-term high Oil prices are less likely, especially as the U.S. is expected to release poor Unemployment Claims data later on today. Traders may look for profit taking after yesterday's bullish trading session. Crude could drop back to the $50.50 mark.
Article Source - Dollar Tumbles as Investors Turn to Riskier Assets
Key Overnight Developments
• UK Consumer Confidence Rises for Fourth Month in April, Says GfK
• Japan's Manufacturing Sentiment, Industrial Production Improve as Inventories Clear
• Australian Business Confidence Fell at Slower Pace in Q1, Says NAB
• Bank of Japan Holds Interest Rates at 0.10% as Expected
The Euro was little-changed in the overnight session: prices initially rose to test as high as 1.3338 but retreated back below the 1.33 level ahead of the opening bell in Europe. The British Pound trended higher, adding as much as 0.6% against the US Dollar.
Asia Session Highlights
UK Consumer Confidence continued to advance for the fourth consecutive month in April according to GfK, a market researcher, rising to -27 from -30 in the previous month. The news is hardly encouraging, however, even if we assume that the metric has put in a bottom despite rising unemployment. Looking at a comparable period of low consumer confidence during the 1990-91 recession, we see that the GfK metric reversed upward in March 1990 but GDP follow suit only 6 months later and did not return to positive growth for a full two years down the road. The absence of expanding output will mean that the central bank is likely to maintain a very loose monetary policy, holding the British Pound back against the currencies of countries where economic growth and by extension interest rates will head higher sooner (most notably the US Dollar).
Japan’s Nomura/JMMA Manufacturing Purchasing Manager Index rose for the fourth consecutive month in April, printing at 41.4 from 33.8 in the previous month. The reading is still below the “boom-bust” 50 level, meaning the manufacturing sector is still contracting, albeit at the slowest pace since October of last year. The improvement reflected expectations that the breakneck pace of decline in output will begin to slow as firms deplete existing stocks of products and are required to replenish. Indeed, Industrial Production rose for the first time in five months in March, rising 1.6%, while inventories shrank for the third consecutive month and the inventory-to-shipments fell -4.9% from a record high. Still, the news is far from rosy: overseas sales remain lackluster as Japan’s top trading partners suffer acute economic slowdown, so any pickup in production can be expected to be shallow. This means firms are unlikely to re-hire labor en masse, keeping the lid on spending and thereby overall economic growth for some time to come. Japan’s Trade Ministry was reasonably unimpressed, calling output “stagnant”.
Australian Business Confidence improved as expected in the first quarter from the three months to December 2008 according to National Australia Bank (NAB). Importantly, the metric continues to show contraction with a print in negative territory. Indeed, NAB chief economist Alan Oster remained cautious after seeing an uptick in the March result, saying, “While an element of fear appears to be abating, the index is still quite low [and] points to falling demand in the first quarter.”
The Bank of Japan kept interest rates on hold at 0.10% as expected. The decision was unanimous and policymakers said they will leave their current 1.8 trillion yen government bond purchasing program unchanged. The Japanese Yen was little changed after the announcement with the outcome widely priced into the exchange rate for some time.
Euro Session: What to Expect
The initial estimate of the Euro Zone Consumer Price Index are expected to show that the annual pace of inflation rose to 0.7% in April from a record low of 0.6% in the previous month. As with the analogous metric from Germany earlier this week, it is far too early to say the rebound owes to a pickup in economic activity, and even more so premature to suppose that prices will continue to rise from here. Currency depreciation may account for the increase, making imported goods comparatively more expensive for European consumers. Indeed, the Euro slipped -1.4% on average against the currencies of the regional bloc’s top trading partners to date this month. Travel and leisure spending linked to Easter may have also helped considering the holiday break fell in April this year rather than its usual time in March. The fallout in commodity prices (particularly oil) and slowing economic activity are likely to weigh on price growth in coming months. In fact, French Producer Prices are expected to fall by a record -5.3% in the year to April, suggesting lower consumer prices ahead as firms pass on lower manufacturing costs via cheaper finished products. The analogous metric in Germany also tumbled during the same period, bolstering the downside scenario for the Euro region as a whole.
If the economy is indeed showing signs of life, this likely owes to a slew of government spending packages put in place across the currency bloc. The ability of these measures to spur a sustainable return to economic growth looks questionable at best, however. Bruegel, a think tank, has estimated that European countries will spend an average of 0.9% of GDP on fiscal stimulus, as compared to 2% being spent in the US. On the monetary front, the European Central Bank seems intent on continued waffling, signaling rate cuts will end with borrowing costs at 1% and seemingly failing to reach a workable consensus on “unconventional measures” (meaning quantitative easing, a policy in place in the US, UK and Japan). This half-hearted approach means that private demand will likely be slow to step in to pick up the baton after the government’s boost is exhausted, keeping unemployment at elevated levels, holding back spending and bolstering expectations for a comparatively slower recovery. Indeed, the Unemployment Rate is expected to rise to 8.7% in March, the highest in 3 years, and is forecast to approach 10% by the end of this year. In Germany, the Euro area’s largest economy, the ranks of the unemployment are expected to jump by another 65,000 people to bring the jobless rate to 8.2%, the highest since January 2008.
Written by Ilya Spivak, Currency Analyst
Article Source - Higher Euro Zone Inflation Unlikely to Signal Recession is Abating (Euro Open)
USD - USD Consolidating towards Heavy Volatility
After Monday's sharp gains against the EUR, the U.S. Dollar experienced a steady depreciation against the 16-nation currency throughout Tuesday, declining back towards 1.3200 after seeing a weekly low of 1.2966. The USD also saw depreciation against almost all currency pairs, except the JPY.
Interesting to take note of is a few general trends in pairs, such as the GBP/USD and USD/CHF, which seem to be trading in a tightening range, indicating that there is an anxious anticipation for tomorrow's interest rate decision from the US Federal Reserve Board. With a decision on the US Federal Funds Rate expected tomorrow at 18:15 GMT, traders may witness some sharp volatility in these pairs directly after the announcement. With the exceedingly positive figure seen in the CB Consumer Confidence report yesterday, mixed with some other general indicators which also point up, is there a possibility that the Fed would consider increasing interest rates?
Today will indeed be an interesting day to keep tabs on the movement of the greenback. Considering the Advanced GDP report is due, along with Crude Oil Inventories, which has had a moderate impact lately, the USD is due for heavy volatility. Traders will definitely need to program reminders into their schedule telling them to login to their platforms today and capture some of the sharp movements that many are expecting.
EUR - EUR and GBP Riding Favorable Winds
So much positive economic data has been emerging in recent weeks that risk appetite seems to have made a moderate recovery. As a result, the EUR has posted steady gains over the past 24 hours. Building back up towards 1.3200 against the USD and 1.2700 against the JPY, the 16-nation currency appears to be on the receiving end of portfolio diversification and Euro-Zone confidence.
With a number of indicators showing a drastic increase in consumer confidence throughout the Euro-Zone's largest economies, it comes as no surprise that the EUR is trending upwards against all of its currency rivals. However, as there appears to be hardly any news coming from Europe today, the EUR may be put on the back-burner as the US economy leads the pack in economic indicators. The U.S. Federal Funds Rate decision will be released tomorrow and no doubt will be one of the primary driving forces in today's market.
While news regarding the EUR may be light this week, the British Pound will not go unnoticed. Much of the European news being released this week may show that the British economy is on track for recovery. It seems about time as Britain appeared to be one of the worst hit economies in this recent recession. If Britain is indeed recovering, the rest of Europe shouldn't be much further off. Watching the indicators emanating from the UK may help traders gauge the direction of the prevailing winds over Europe. So far, European trends appear to be pointing up.
JPY - JPY Set Back from Increased Risk Appetite
As world tourism faces a further set-back due to the outbreak of swine flu in 7 countries, the value of the JPY as a safe-haven from economic risks appears to have continued to drop. The rise in risk appetite, and a continuation of the negative outlook in Japan, has pushed the JPY lower against most of its currency rivals, save the USD. Dropping towards the 127.00 level against the EUR and the 141.00 level versus the Pound, the JPY appears like it may level off in the near future.
With a decision from a number of Pacific countries arriving this week on interest rates, traders have the potential to see a level of volatility in the JPY and NZD which is typically uncommon. Traders should look to the Reserve Bank of New Zealand (RBNZ) today, as it is set to announce a decision on its national interest rate. Most expectations are for a 50 basis point rate-cut. The Bank of Japan (BoJ) is also set to announce its latest monetary policy regarding interest rates on Thursday, although this decision will not likely carry much volatility as Japan has held its rates steady for some time now.
Crude Oil - Crude Oil Declines on Demand Concerns
Crude Oil prices fell for a second straight day on concerns that the outbreak of swine flu would delay an economic recovery and further dampen energy demand. Fears of pandemics have slowed the global economy in the past and officials with the World Health Organization, while raising alert levels yesterday, and warned against overreacting. The fear is that the outbreak could discourage people from traveling, lead to closed factories and further hurt the economy and oil consumption.
Oil prices rose sharply last month from $40 to above $54 taking their cue from a rally in equity markets. But a new sign of a prolonged recession which has crushed energy demand around the world is again pushing prices lower below the psychological price level of $50.
Article Source - Market's Focus on the Federal Reserve Rate Decision
Key Overnight Developments
• New Zealand Annual Trade Deficit Shrinks on Falling Currency
• NZ Business Confidence Negative for Sixth Straight Month
• Euro, British Pound Follow Stocks Higher Against US Dollar
The Euro added 0.5% against the US Dollar to test above the 1.32 level late into the session. The British Pound followed suit, adding 0.6% against the greenback. USD sold off as stocks rose for the first in three days in Asian trading.
Asia Session Highlights
New Zealand’s Trade Balance deficit narrowed to print at –NZ$4.8 billion in the year to March, down from –NZ$5.2 billion in the previous month. Exports grew at an annualized rate of 17.7%, outpacing a 6.9% rise in imports as the New Zealand dollar fell -18.25% in the 12 months from March 2008 to boost foreigners’ purchasing power of the antipodean nation’s products. The trade gap is likely to contract further if a downward reversal in risky assets continues to weigh on the exchange rate. An average of the New Zealand Dollar’s value against a trade-weighted basket of global currencies is now 91% correlated with the MSCI World Stock Index.
A separate report showed NBNZ Business Confidence jumped to -14.5 in April from -39.3 in the previous month. While the result is an improvement, the print in negative territory continues to suggest that a majority of firms (albeit a narrowing one) surveyed for the study are expecting economic conditions to deteriorate over the next 12 months. Most notably, the NBNZ gauge has been oscillating below the zero level for the better part of 7 years (aside from one outlying uptick in September 2008). The annual pace of GDP growth has trended lower for the majority of the same period, suggesting any connection between the uptick and an end to the current downturn is dubious at best.
In Australia, the Housing Industry Association reported that New Home Sales grew 4.2% in March, marking a significant slowdown from the 7.8% recorded in the previous month. We had anticipated the result in our Australian Dollar Weekly Forecast, noting that vehicle sales fell at the fastest pace in 9 years during the same period, reflecting Australian consumers’ continued hesitation to commit to big-ticket purchases. This seems logical considering the deepening economic downturn has pushed the unemployment rate to a 5-year high of 5.7%, weighing on disposable incomes, while access to borrowing has dwindled to unprecedented levels.
Euro Session: What to Expect
Euro Zone Economic Confidence is expected to rise for the first time in 11 months, rebounding from a record low at 64.6 to print at 65.6 in April. The metric is a weighted composite of five sector-specific sentiment surveys including Industrial Confidence (40%), Service Confidence (30%), Consumer Confidence (20%), Construction Confidence (5%), and the Retail Trade Confidence Indicator (5%). Improvements are expected across the various components and are likely linked to record-low interest rates and a slew of government spending packages put in place across the currency bloc. The ability of these measures to spur a sustainable return to economic growth and thereby encourage long-term strength in the Euro looks questionable at best, however. Bruegel, a think tank, has estimated that European countries will spend an average of 0.9% of GDP on fiscal stimulus, as compared to 2% being spent in the US. On the monetary front, the European Central Bank seems intent on continued waffling, signaling rate cuts will end with borrowing costs at 1% and seemingly failing to reach a workable consensus on quantitative easing. This half-hearted approach means that private demand will likely be slow to step in to pick up the baton after the government’s boost is exhausted, bolstering expectations for a comparatively slower recovery.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro, British Pound Follow Stocks Higher Against US Dollar (Euro Open)
USD - Dollar Rises on Swine Flu and Lower Equity Markets
Yesterday's trading in the currency market was highly influenced by the outbreak of swine flu in Mexico. Worries about a spreading outbreak drove losses in equity markets, and with that came forex traders buying safe haven currencies. As such, the Dollar and the Yen were the prime beneficiaries. The Dollar rose sharply against the EUR as comments by the European Central Bank (ECB) President sunk the European currency along with other risk sensitive currencies. However, the Dollar fell against the JPY.
The flu pandemic has been driving trading in the financial markets the past two days. A void of economic data has also created opportunities for markets to head south. Trading has been characterized as extremely risk averse. Losses in equity markets and moves to the Dollar and Yen were seen as an example of this trading behavior. However, this pattern may be only short lived as an important economic indicator is set to be released tomorrow.
The Conference Board will release its Consumer Confidence index at 2:00pm GMT. The survey is a leading indicator of consumer spending and is an excellent gauge of current economic conditions and the overall economic situation. The release of the survey typically creates a volatile trading environment, affecting not only the USD pairs but also the value of Crude Oil and Gold. A survey with a result greater than the forecasted value of 29.6 could send the EUR/USD below the 1.2950 mark.
EUR - ECB Remarks Punish the EUR
The EUR suffered its largest 1-day drop versus the Dollar in a month on comments from two members of the European Central Bank (ECB). ECB Governing Council member Ewald Nowotny remarked there is the potential to hold European Interest Rates at a low for the foreseeable future. Later in the day ECB President Jean-Claude Trichet declared that the ECB will announce at its next scheduled meeting on May 7th a new program of quantitative easing. This sent the EUR/USD plunging to 1.3024 from 1.3166. The EUR/JPY also suffered during yesterday's risk adverse trading session, ending the day at 125.43 from 127.18.
It is expected that the ECB will lower Interest Rates by 25 basis points to 1.25% at their next meeting. No further comments were made by Trichet of the proposed unconventional measures for monetary policy. However, further weakening may be seen in many of the EUR pairs in the coming days. This is likely to be more apparent if traders continue to flock to safe haven currencies, such as the USD and JPY as the Swine Flue pandemic continues to spread.
Throughout the day today Preliminary Consumer Price Index numbers will be released. This data is the Euro-Zone's earliest inflation numbers and could help to lower the EUR during today's trading. The EUR currency crosses are also likely to be affected by important economic news events coming out of the U.S. and Britain. These include the U.S. CB Consumer Confidence at 2:00 pm GMT and the British CBI Realized Sales at 10:00 am GMT.
JPY - JPY Goes Bullish on Safe Haven Status
The Yen showed signs of a return to its risk haven status of old as fears of Swine Flu have traders moving out of riskier, higher yielding currencies into the safe haven of the Yen. The logic of this move is a wider outbreak of the flu may increase the amount of time the global economy will need to recover from the current recession. In light of these market conditions, the Yen continues to strengthen. The USD/JPY fell for a 9th day in a row to settle at 96.30 from 96.59. The Yen also climbed against the GBP, ending the day at 140.69 from 140.97.
Japanese banks will be closed for a Bank Holiday today. Major institutional banks are key contributors to liquidity in the forex market. With their closure, price moves can become exaggerated by currency speculators. This can provide ripe opportunities for forex traders to take advantage of the unusual price volatility today. Additionally, traders are likely to take advantage of this more during times of important data releases coming out of the key industrialized nations today.
Crude Oil - Crude Oil Dips on Swine Flu Fears
The price of Crude Oil fluctuated greatly yesterday as worries of Swine Flu took hold of the market. Crude Oil dipped as low as $47.98, though it failed to break a key support level. The price finally settled at 49.37 from an opening price of $50.34. Worries that any economic recovery could be delayed due to transportation restrictions or the flow of human capital would severely hurt Crude Oil demand and sank the price of Oil yesterday.
The long term impact of Swine flu could have a muted impact. As such we could see a fair value of Crude Oil near the mid $40 range. Notably higher Crude Oil inventories during the warmer months is implying that fuel consumption will be significantly lower in the upcoming peak travel season. In the meantime, better-than-expected economic data from the U.S. and Euro-zone may help prevent Crude prices from slipping further into the red.
Article Source - Swine Flu Prompts a Return to Safe Haven Buying
Key Overnight Developments
• Japanese Retail Sales Shrink for Seventh Month on Unemployment
• US Dollar Rises as Asian Stock Exchanges Erase Early Gains
The Euro oscillated in a well-defined 40-pip range for much of the overnight session but bearish momentum seemed to pick up ahead of the opening bell in London, pushing prices to test below the 1.30 level to the US Dollar. The British Pound trended lower, shedding as much as -0.6% against the greenback. Technical positioning favors a bearish outlook on both EURUSD and GBPUSD.
Asia Session Highlights
Japan’s Retail Trade figures revealed that sales shrank for the seventh consecutive month in March, shrinking at an annual pace of -3.9% after a -5.8% contraction in the preceding month. The pattern is a familiar one: dwindling overseas sales have pushed firms to scale back capacity, boosting unemployment and weighing on consumer spending to keep downward pressure on overall growth. Indeed, yesterday saw Japan’s government forecast that the world’s second-largest economy will shrink -3.3% this year, the recession since the Second World War. Finance Minister Kaoru Yosano said Japan remains in “crisis”.
The US Dollar added 0.3% on average against a basket of to global currencies, boosted by demand for safety as Asian stock markets erased early gains and US equity index futures pushed deeper into negative territory. The MSCI Asia Pacific Index slipped -1.5% and futures on the Dow Jones and the S&P 500 indices slipped over 1% on news that Bank of America and Citigroup were told by US regulators that they still need additional capital following a series of “stress tests”.
Euro Session: What to Expect
Preliminary estimates of Germany’s Consumer Price Index are expected to show that prices rose 0.1% in April to bring the annual inflation rate to 0.8% from 0.5% in the previous month. It would be premature to say the rebound owes to a pickup in economic activity, and even more so premature to suppose that prices will continue to rise from here. Currency depreciation may account for the increase, making imported goods comparatively more expensive for German consumers. Indeed, the Euro has shed 2.1% on average against the currencies of Germany’s top non-EZ import partners (China, UK, US). If the economy is indeed showing some life, this likely owes to record low interest rates and an 82 billion euro government stimulus package. The ability of these measures to spur sustainable growth seems questionable at best, however: the world’s fourth-largest economy could afford a far greater fiscal effort considering the kind of spending being done by the US, China and Japan; on the monetary front, Germany’s experience with hyperinflation in the 1920s have made it thoroughly averse to anything that even smells like printing money, putting its representatives to the European Central Bank at the head of the faction arguing against quantitative easing. This half-hearted approach means that private demand will likely be slow to step in to pick up the baton after the government’s boost is exhausted, keeping unemployment at elevated levels and holding back spending. Indeed, the jobless rate is expected to reach above 9% by the end of this year. Adding yet more wood to the fire, the International Monetary Fund recenly reported that European banks, many of them German, still carry $1.1 trillion in unrealized losses linked to subprime assets.
In Switzerland, the UBS Consumption Indicator is likely to continue lower in March after printing at the lowest level in 5 years in the previous month. The unemployment rate stands at 3.4%, the highest in 3 years, and is expected to surpass 4% by the end of this year. This will trim disposable incomes and is likely to continue to discourage spending.
Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Extends Gains as Stock Markets Tumble on Stress Test Results (Euro Open)
USD - Swine Flu puts Downward Pressure on the USD and Tourism
The U.S. Dollar appeared to be losing ground against all of its major currency counterparts towards the end of last week's trading. It dropped to one-week lows against its rivals, falling to 1.3300 against the EUR, 1.4750 against the Pound, and 96.65 against the JPY last Friday. Apparently a number of news events, not wholly related to economic fundamentals, made an impact on the value of the USD last week.
With Ecuador claiming that they will continue to use the USD as their currency, the greenback received a modest level of support from the southern Hemisphere, not necessarily unrelated to President Barack Obama's recent meeting with South American leaders.
In other news, fears of the recent outbreak of swine flu put a major dent in the Dollar as traders began speculating that U.S. tourism would drop in the coming months as a result, and therefore pulled out from the greenback in exchange for an alternative safe-haven. Also, the run-up to the latest round of G7 and IMF meetings put a slightly positive spin on world stocks and the idea of a balanced investment portfolio. This lent weight to the notion of pulling money away from the USD.
The good news for the USD is that it has begun an across-the-board correction during today's early trading hours due to a number of Dollar-positive news events. Recent announcements that Chrysler, an American auto giant, may not need to declare bankruptcy has returned some confidence to the U.S. currency. The impending light news week also has the Dollar prepared to take a seat on the bench for the days ahead. Without driving its own market, the USD is more susceptible to world trends and may therefore be at the mercy of the EUR and JPY this week. With a few potentially damaging reports due, the USD may climb back towards 1.3000 against the EUR and 97.50 against the Yen over the next few days.
EUR - EUR Positive After PMI and Ifo Provide Surprising Results
The EUR gained steady momentum against most of its currency rivals last week. Hitting a one-week high against most of its currency counterparts, the EUR climbed above 1.3300 against the Dollar and near 0.9100 against the Pound Sterling. The question remains as to whether the 16-nation currency can hold onto these advances throughout the coming week.
Startling news emerged from the Euro-Zone as the European Union (EU) made overtures towards the idea of Iceland joining the union. After its national bankruptcy last year, the small island country has been struggling to catch up.
In economic news, the staggeringly high PMI numbers from the Euro-Zone regional economy generated a strong movement towards the EUR at the end of last week's trading; no doubt adding to the EUR's bullish run. Supporting this bullish momentum was the additional news from the German Ifo Business Climate report which signaled that the Euro-Zone may actually have bottomed and is beginning its steady road to recovery.
With the moderate news week ahead for the EUR, we may see the recent strength continue so long as economic fundamentals produce better than expected results like they did last week. However, the optimism which was soaring high at the end of last week, may have corrected itself downward as the realization of an economy hitting rock bottom sank in. While a good signal that the Euro-Zone is starting its recovery. The long road ahead may indeed stymie this bullish movement. Traders may want to look for a downward-correcting EUR this week.
JPY - JPY's Recent Gains Set to Reverse
The Japanese Yen was set to advance itself throughout this week, after gaining steadily against most of its rivals, especially the USD. However, as the Nikkei index opened lower at the start of this week, the Yen's safe-haven move may have ended abruptly this morning. Growing as high as 96.65 against the USD and 127.50 against the EUR, the Yen may now see a correction throughout the impending hours due to poor stock performance and a USD-positive trading session.
With the recent scare over the swine flu outbreak in the United States, the JPY was bought up as an alternative safe-haven against the USD as tourism in the U.S. was expected to drop. Nevertheless, the JPY now appears to be paring off its recent gains as stock markets indicate a lack of confidence in the Japanese currency. Traders may look to the Yen depreciating against most of its currency rivals throughout the next few days, especially with a heavy news week for the JPY which may illuminate the inherent weakness of the island economy.
Crude Oil - Is OPEC Planning Further Production Cuts?
After failing to breach the resistance level of $52 a barrel last week, the price of Crude Oil appears to be coming back down. Recent press releases from the various oil ministers in member countries of the Organization of Petroleum Exporting Countries (OPEC) have stated that the latest price volatility has been damaging to the future of the oil industry. Such volatile price swings as those seen over the past 8 months can cause irreparable carnage to an industry in need of heavy foreign investment.
Without clear data regarding the current supply and demand levels in the world's energy supplies, organizations such as OPEC have little to go on but recent price levels. If prices don't find strong support in the coming weeks, the cartel may be forced to call for further production cuts in order to boost prices back to levels where investment becomes feasible. If oil prices continue where they are, this move may be more likely. Traders need to keep an eye on hawkish statements such as these from members of OPEC as it could signal a shift towards further production cuts, and the possibility of an increase in the value of Crude Oil.
Article Source - Greenback is Knocked Down by the Swine Flu in Mexico
Key Overnight Developments
• US Dollar Rises as Dow Jones, S&P 500 Futures Slip Over 1%
• Euro, British Pound Follow Risky Assets Lower
The Euro trended lower against the US Dollar, losing as much as -0.7%. The British Pound followed suit, shedding as much as -0.6% against the greenback. Technical positioning favors a bearish outlook on both EURUSD and GBPUSD.
Asia Session Highlights
With little of note on the economic calendar, markets fell back on risk sentiment as the principal driver for forex price action. Futures on the Dow Jones and S&P 500 stock indices slipped over 1%, suggesting investors are betting that Wall St. stocks will move lower to start the trading week. The MSCI Asia Pacific Index erased initial gains after Hong Kong stocks dropped over 2% in early trading as Financial Times reported that American Express Co. and Allianz SE will sell their stakes in ICBC, China’s biggest bank, for a combined $2 billion. Asian exchanges initially moved higher following Friday’s Wall St. rally on news that the US Federal Reserve’s stress tests revealed most banks are adequately capitalized.
The retreat in risky assets boosted US Dollar – an index of the greenback’s average value against six top global currencies gapped higher to start the week and rose as much as 0.5% ahead of the opening bell in Europe. The US Dollar has been seen as a safe-haven asset amid falling stock markets, showing a -84% inverse correlation with global stock performance (based on a 90-day rolling correlation study).
Euro Session: What to Expect
An uneventful economic calendar is likely to yield to risk sentiment as the principal driver for forex price action in European hours. If stock markets continue to slip into negative territory, the US Dollar is likely to extend gains against the spectrum of major currencies.
A brief scan of European data is set to reveal deepening recession – the Import Price Index is set to drop -6.5% in the year to March, the most in over a decade; meanwhile, the GfK Consumer Confidence Survey is expected to print at 2.3 in May, the lowest since February.
Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Pushes Higher as Traders Bet on Wall St Weakness (Euro Open)
Fundamental Outlook for US Dollar: Bullish
- First quarter earnings may have been a positive factor so far, but the outlook is still far from encouraging
- Fed says recession ‘substantially reduced’ some banks’ capital though most are still well-capitalized
- Do technicals support a dollar bullish forecast? Read the FX Technical Weekly to find out.
Despite a relatively light docket of scheduled economic event risk, the US dollar tumbled against most of its counterparts this past week. This was due to the market’s acute interest in risk trends and the dollar’s association to such macro concerns. In the week ahead, fundamental conditions threaten to be far more complicated which could in turn lead to far greater levels of volatility and/or momentum. To garner a sense of what could move the market and how specifically it impacts the world’s most liquid currency, we will address each of the major themes likely to influence price action one by one. However, it is important to distinguish between those drivers that will have an immediate and decisive impact on the dollar and those that could have a drawn out impression. Both the first quarter GDP release and FOMC rate announcement have clearly defined parameters for timing and influence. In contrast, there is no clear scenario for how forecasts from global policy officials and the steady flow of earnings reports could sway a currency that has to balance its place in the economic food chain with its status as a safe haven.
There is no way of telling which manner of event risk (schedule release or general risk) will have the more pervasive effect on the US dollar; but recent history suggests we follow the currency’s function as a capital refuge. Immediate concern is the cumulative and distilled outlook for global growth and policy that comes out of the various meetings scheduled over the weekend and beyond. The G7 released met on Friday; but their seemed to offer little progress towards the world-wide rescue beyond offering a forecast for a ‘weak’ recovery by the end of the year and offering a warning that toxic assets are still a serious threat. There was sideline commentary suggesting the member nations have taken steps towards realizing the G20’s Agenda points from the London summit; but there is little evidence to substantiate such claims. Going forward, market participants will actively monitor the news wires for signs that the recovery in sentiment is unrealistic. An official statement from the G20 would be read over with a fine-toothed comb, traders will gauge the sway of proposals from the IMF and World Bank meetings this weekend, and fundamental traders will never ease up on their vigilance over nation’s individual efforts to stabilize their own economies.
The other indeterminable factor for dollar traders is the ongoing release of first quarter earnings reports. On the whole, its seems revenues and net income for American firms was stronger than analysts were predicting through the first quarter. However, this is an unreliable benchmark to gauge sentiment and economic health against. Firms are still clearly struggling with the recession and lack of credit as bottom lines that are splashed in red. This is an particularly important point to make with the financial sector (and more to the point, the 19 banks that are being reviewed for the Fed’s stress test). Traders the world over are waiting for the Federal Reserve’s assessment of how the banking giants will fair should the recession linger. In a white paper that explained the examiners’ methodology for judging each institution’s health, it was said that ‘most’ of those under scrutiny had sufficient capital – suggesting some will fail.
It is far easier to prepare and scale the impact of the advanced reading of 1Q GDP and the Fed’s rate decision. There is growing consensus that the central bank will further shrink its target range, but such a move would change little. More meaningful is the growth report. There have been claims from various policy officials of initial signs of stabilization and a decelerating pace of recession. These assertions will be immediately confirmed or denied by this specific piece of event risk. As the world’s largest economy, should data confirm a slower pace of annual contraction (as economists predict), it would be the first tangible sign that conditions are indeed improving.
Euro at Critical Crossroads versus US Dollar
Fundamental Outlook for Euro This Week: Bearish
- Euro gains as PMI shows signs of “Second Derivative” Growth Improvement
- German IFO Business Confidence survey improves – Euro rallies
- Euro Bear Trend may nonetheless be in its infancy
The Euro finished the week marginally higher against the US Dollar, but it extremely choppy price action makes it difficult to anticipate continued gains through near term trade. Last week we forecasted that a turnaround in the US S&P 500 and other risky asset classes would lead to a similar pullback in the Euro. Yet an early-week decline quickly reversed and led to a similar bounce in the EUR/USD. The US S&P now stands an impressive 30 percent higher from multi-year lows and a mere 4.1 percent down on a year-to-date basis. The impressive recovery in risk appetite has had a noteworthy effect on the Euro, but we continue to question whether such financial market improvement is truly sustainable. Early-week market tumbles emphasize that equities and other key risk barometers remain extremely fragile, and it may be only a matter of time before we see large corrections in the S&P and major world equity indices.
Our outlook for the Euro/US dollar remains bearish, but the true litmus test may come at resistance near the 1.3400 mark. Said level represents an important multi-week high and the 61.8 percent Fibonacci retracement of the 1.3750-1.2880 move—a “line in the sand” for technical traders. Fundamental biases are far harder to establish due to the current economic climate. A busy week of European and US economic event risk may only exacerbate this point, and it will be critically important to watch for shifts in trader sentiment following a key number of data releases.
Likely highlights in the week ahead include German and broader Euro zone Consumer Confidence, CPI Inflation, and especially important Employment results. Recent German Ifo Business survey figures suggest that investor confidence has bottomed and many now expect business conditions to improve through the foreseeable future. This may amount to little, however, if Consumer Confidence does not show a commensurate improvement, and markets will likely respond to any surprises in German Gfk survey results. The very next day’s German Consumer Price Index inflation results could likewise spark volatility in the EUR/USD. Analysts predict that yearly price growth remained at a relatively robust 0.8 percent through April. This stands in stark contrast to a -0.1 percent rate in the United States and perhaps explains why the European Central Bank has thus far kept interest rates well-above their US counterpart. Uncertainty surrounding ECB monetary policy may make for especially large moves on big surprises.
Last but certainly not least, markets will pay close attention to Friday’s Unemployment stats out of Germany and the broader Euro zone. Labor market reports remain very politically important, and any especially noteworthy deterioration in jobless rates could put further pressure on domestic governments and the ECB. Though further fiscal stimulus packages seem unlikely, politicians continue to lean on the ECB—calling for Quantitative Easing measures in order to boost money supply. Any such announcement could easily derail the Euro’s recent bounce.
Japanese Yen Trades Must Gauge Risk and the Currency’s Relation to It
Fundamental Outlook: Bearish
- G7 forecasts a ‘weak’ rebound later this year; though banks’ toxic assets still a serious problem
- Japanese trade balance marks it worst annualized deficit in 29 years
- Bank of Japan Governor Masaaki Shirakawa tells economists not to mistake a temporary rebound as a genuine recovery
There is an ongoing debate as to whether the yen is a sensible safe haven currency considering the financial and economic troubles Japan is suffering. This is argument that will carry over into next week – and just as the market’s tolerance for risk is put to the test through a wave of major fundamental catalysts. Therefore, traders will first have to assess the ever-fluctuating level of sentiment through G20 and IMF policy statements, a mooring US first quarter growth report and ongoing register of market health derived through earnings releases. Then, they will have discern the level of optimism or panic that is borne from this mix and judge whether the Japanese currency is a viable safe haven via the depth of its markets and sheer size of its economy. Anything less than borderline fear or a dour forecast for the markets will likely see the once sacrosanct safe haven / yen correlation drift apart.
First, in taking stock of the economic mines that could leverage panic and volatility; we can see that there is a lot to keep track of. This weekend, the spot light will fall on the various meetings scheduled for the world’s policy makers. The G7 meeting has already passed with little more than cheerleader optimism; and any G20 statement is likely to provide little more. What traders really crave is tangible policy steps with responsibility and consequence along the way that can truly put the world on track to correcting what is clearly a global problem. To the extent of its capabilities, the IMF’s semi-annual meeting will likely produce better results. However, while this group has been very blunt on the current state of affairs and what needs to be done to genuinely turn economic activity around; the organization doesn’t have the clout to push policy onto the world’s leading nations. Moving beyond the weekend, the risk barometer will find input from the change in sentiment derived from earnings. Better-than-expected revenues is not the same thing as profits that are expected to expand as the year progresses. Net profit, write downs, delinquencies and non-performing assets are components that will not be overlooked. Finally, in measuring the health of the financial markets; we first gauge the health of the economy that supports it. The first quarter reading for US GDP will fill this role nicely. Should the world’s largest nation report a slower pace of contraction as expected, it could interpreted as the first (meaningful) step towards a working recovery.
After assessing the ebb and flow of risk sentiment, the fundamental crowd then has to decide whether the yen is indeed the proper currency to represent safety. This leads us to examine the health of the island economy. Over the past few days, Japanese policy officials have painted a grim outlook for economic activity (even taken within the context of a global recession). Despite confirming the worst recession for the world’s second largest economy in over a quarter of a century through the fourth quarter, the Bank of Japan’s top economist predict worse over the opening months of this year. The same sentiment was shared by BoJ Shirakawa. Data is working hard to confirm such fears as well. This past week, the ministry reported the worst annual trade deficit in nearly three decades. This will be followed up by employment, spending, factory activity, and auto sales data in the days ahead. When measuring this economic fodder against sentiment, questions will only arise should pessimism reign. Otherwise, if sentiment is improving, there is no need for a safe haven and the bleak future for Japan means there is really no reason to buy yen.
British Pound to Follow Stock Prices Lower if Risk Appetite Abates
Fundamental Forecast for British Pound: Bearish
- UK House Prices Rose for Third Straight Month in April, Says Rightmove
- Retail Prices Turned Negative for the First Time Since 1960 in March
- Unemployment Rate Rises to Highest in Over a Decade
- UK Budget Deficit Tripled, Rising to 90 billion Pounds in 2008
- Gross Domestic Product Shranks 1.9% in the First Quarter, Most in 30 Years
The British Pound is likely to look past an uneventful economic calendar to be driven lower by a reversal in risk trends across global financial. The sterling’s average value against a trade-weighted basket of global currencies is now 83.2% correlated with the MSCI World Stock Index, a composite of global equities’ performance. For its part, the MSCI metric began last week with a sharp reversal lower from resistance at the top of a falling channel that has contained prices since October 2008. Stocks inched higher for the remainder of the week, managing to re-test resistance but failing to close above it by Friday’s close. If this was merely a correction to re-test resistance, a return to bearish momentum awaits in the week ahead that is sure to take the British Pound along for the ride. Some upside risk does remain, however, on the heels of cautiously optimistic rhetoric from the G7 summit in Washington, DC.
Looking at the data docket, Gfk Consumer Confidence is expected to continue to advance for the fourth consecutive month in April, rising to -28 from -30 in the previous month. The news is hardly encouraging, however, even if we assume that the metric has put in a bottom despite rising unemployment. Looking at a comparable period of low consumer confidence during the 1990-91 recession, we see that the GfK metric reversed upward in March 1990 but GDP follow suit only 6 months later and did not return to positive growth for a full two years down the road. The absence of expanding output will mean that the central bank is likely to maintain a very loose monetary policy, holding the British Pound back against the currencies of countries where economic growth and by extension interest rates will head higher sooner (most notably the US Dollar). Turning to the housing market, any immediate impact from small improvements in March Consumer Credit and Mortgage Approval readings may be offset with Nationwide expected to report that property prices turned lower in April to shrink at an annual pace of -15.8%. The survey would conflict with a similar report by Rightmove, but its later release suggests a more accurate reading on what April’s housing market actually looked like.
Written by John Kicklighter, David Rodriguez, Ilya Spivak, John Rivera and David Song, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 04.27.09
Moving average is one of the most popular and easy to use tools available for doing technical analysis. It means the average price of a currency over a specified time period (the most common being 20, 30, 50, 100 and 200 days), used in order to spot pricing trends by flattening out large fluctuations. Moving average data is used to create charts that show whether a currency’s price is trending up or down. They can be used to track daily, weekly, or monthly patterns. Each new day's (or week's or month's) numbers are added to the average and the oldest numbers are dropped, thus, the average "moves" over time. In general, the shorter the time frame used, the more volatile the prices will appear, so, for example, 20 day moving average lines tend to move up and down more than 200 day moving average lines. There are four different types of moving averages: Simple (also referred to as Arithmetic), Exponential, Smoothed and Linear Weighted. Moving averages may be calculated for any sequential data set, including opening and closing prices, highest and lowest prices, trading volume or any other indicators. It is often the case when double moving averages are used.
The only thing where moving averages of different types diverge considerably from each other is when weight coefficients, which are assigned to the latest data, are different. In case we are talking of simple moving average, all prices of the time period in question are equal in value. Exponential and Linear Weighted Moving Averages attach more value to the latest prices. The most common way to interpreting the price moving average is to compare its dynamics to the price action. When the instrument price rises above its moving average, a buy signal appears, if the price falls below its moving average, what we have is a sell signal. This trading system, which is based on the moving average, is not designed to provide entrance into the market right in its lowest point, and its exit right on the peak. It allows acting according to the following trend: to buy soon after the prices reach the bottom, and to sell soon after the prices have reached their peak. Moving averages may also be applied to indicators. That is where the interpretation of indicator moving averages is similar to the interpretation of price moving averages: if the indicator rises above its moving average, that means that the ascending indicator movement is likely to continue: if the indicator falls below its moving average, this means that it is likely to continue going downward.
Simple Moving Average (SMA)
Simple Moving Average is the simplest type of moving averages. Basically, SMA is calculated by adding the last number in the period from the closing price, and then dividing that number with a period. Let me explain in example, if you select SMA 5 on a 1 hour graph, add the closing prices for the last 5 hours, and then divide that number by 5. If you select SMA 5 on a 30 minute graph, you will add the closing prices for the past 150 minutes (30*5), and then divide that number by 5. In the same way you can calculate SMA for any time period.
Most of the trading platforms will make all these calculations for you. The reason why I am bothering you with this component of technical analysis is because it is extremely important to understand how to calculate the moving average. If you understand how every moving average is calculated, you can make your own decision, which type is the best for you.
Like any other indicator, SMA works with a delay. Because you observe the average price, you are actually looking at the "forecast" of future prices, not the concrete future. Here's an example of how moving averages reduce the price activity:
On the previous chart you can see 3 different SMA. As you can see, the bigger period SMA you take, the more it stays behind the more prices. You probably noticed that the 62 SMA is much further away from current prices then 30 and 5 SMA. This is because with 62 SMA you are adding closing prices from the last 62 periods and dividing it with 62. The higher the number of periods that you are using, the slower is reaction to the movement of prices. SMA on this graph shows the overall sentiment in the market in a given period. Instead of just looking at the current price on the market, moving averages provide a broader view, and give us the general prediction of prices in the future.
SMA = SUM (CLOSE, N)/N ; Where:
N = number of calculation periods
Exponential Moving Average (EMA)
Although SMA is an excellent tool, one major problem is associated with it: SMA is very sensitive to sudden jumps (spikes). By looking at the next example you will better understand what I mean:
Suppose that we draw a 5 SMA on the daily chart of EUR / USD and the closing prices for the last 5 days are as follows: 1st day - 1.2345, 2nd day - 1.2350, 3rd day - 1.2360, 4th day - 1.2365, 5th day - 1.2370. SMA would be calculated as: (1.2345+1.2350+1.2360+1.2365+1.2370)/5 = 1.2358. But what if the 2nd day price was 1.2300? SMA result would be much lower and you get the impression that the price is going down, when in reality, 2nd day may perhaps have been only one remote event (for example, reduction of the interest rate).
What I am trying to indicate is that the SMA may sometimes be too simple. If there was only a way to filter the jumps so that we do not get the wrong picture and make the most out of moving averages. It exists and is called the Exponential Moving Average (EMA).
EMA is a type of moving average that is similar to Simple Moving Average, except that more weight is given to the latest data. The Exponential Moving Average is also known as "Exponentially Weighted Moving Average". This type of moving average reacts faster to recent price changes than a Simple Moving Average. In our example above, EMA would put more weight on the 3rd-5th day, which means that jump on the 2nd would have a lesser value and would not influence so much on the moving average. It would put more emphasis on what traders are doing right now. While trading, it is more important to see what merchants are doing right now, not what they were doing last week or last month.
EMA = (CLOSE(i)*P)+(EMA(i-1)*(100-P)) ; Where:
CLOSE(i) = the price of the current period closure
EMA(i-1) = Exponentially Moving Average of the previous period closure
P = the percentage of using the price value
Smoothed Moving Average (SMMA)
A Smoothed Moving Average is sort of a cross between a Simple Moving Average and an Exponential Moving Average, only with a longer period applied. The Smoothed Moving Average gives the recent prices an equal weighting to the historic ones. The calculation does not refer to a fixed period, but rather takes all available data series into account. This is achieved by subtracting yesterday’s Smoothed Moving Average from today’s price. Adding this result to yesterday’s Smoothed Moving Average, results in today’s moving average.
In a Simple Moving Average, the price data have an equal weight in the computation of the average. Also, in a Simple Moving Average, the oldest price data are removed from the moving average as a new price is added to the computation. The Smoothed Moving Average uses a longer period to determine the average, assigning a weight to the price data as the average is calculated. Thus, the oldest price data points in the Smoothed Moving Average are never removed, but they have only a minimal impact on the moving average, which is similar to how an Exponential Moving Average places more weight on the more recent data.
The first value of this smoothed moving average is calculated as the simple moving average (SMA):
SUM1 = SUM(CLOSE, N)
SMMA1 = SUM1/N
The second and succeeding moving averages are calculated according to this formula:
SMMA(i) = (SUM1-SMMA1+CLOSE(i))/N ; Where:
SUM1 = the total sum of closing prices for N periods
SMMA1 = the smoothed moving average of the first bar
SMMA(i) = the smoothed moving average of the current bar (except for the first one)
CLOSE(i) = the current closing price
N = the smoothing period
SMA versus EMA
If you want a moving average which will match the movement of prices quite quickly, then the EMA with a short period (eg. 3, 5, 8) is the best choice for you. This may help to ''hunt down'' the trend in the early stage, which will result in higher profits. Specifically, the earlier you have caught the trend, the more you can ''ride'' through it, and you can make more money. The pitfall is that while using this type of moving average you can get a false signal which you won’t recognize and lose your investment. Since the moving average quickly matches the price, you can even think that a new trend is forming, but in fact it is just an abrupt jump, which returns to the starting position (spike).
With SMA the situation is completely opposite. If you want the moving average to respond more precisely and slowly to the price changes, then the longer period SMA is the best choice for you. Although slow responding to the price changes will save you from many possible pitfalls, the smaller SMA may also result in too much delay and missing of a good trade.
Uses for Moving Averages
There are many uses for moving averages, but three basic uses stand out:
1. Trend identification/confirmation
2. Support and Resistance level identification/confirmation
3. Trading Systems
Which is better?
Which moving average you use will depend on your trading and investing style and preferences. The Simple Moving Average obviously has a lag, but the Exponential Moving Average may be prone to quicker breaks. Some traders prefer to use Exponential Moving Averages for shorter time periods to capture changes quicker, while others prefer Simple Moving Averages over long time periods to identify long-term trend changes. In addition, much will depend on the individual security in question. Moving average type and length of time will depend greatly on the individual security and how it has reacted in the past.
The initial thought for some is that greater sensitivity and quicker signals are bound to be beneficial. This is not always true and brings up a great dilemma for the technical analyst: the tradeoff between sensitivity and reliability. The more sensitive an indicator is, the more signals that will be given. These signals may prove timely, but with increased sensitivity comes an increase in false signals. The less sensitive an indicator is, the fewer signals that will be given. However, less sensitivity leads to fewer and more reliable signals. Sometimes these signals can be late as well.
For moving averages, the same dilemma applies. Shorter moving averages will be more sensitive and generate more signals. The EMA, which is generally more sensitive than the SMA, will also be likely to generate more signals. However, there will also be an increase in the number of false signals and whipsaws. Longer moving averages will move slower and generate fewer signals. These signals will likely prove more reliable, but they also may come late. Each investor or trader should experiment with different moving average lengths and types to examine the trade-off between sensitivity and signal reliability.
Moving averages smooth out a data series and make it easier to identify the direction of the trend. Because past price data is used to form moving averages, they are considered lagging, or trend following, indicators. Moving averages will not predict a change in trend, but rather follow behind the current trend. Therefore, they are best suited for trend identification and trend following purposes, not for prediction.
When to Use
Because moving averages follow the trend, they work best when a currency is trending and are ineffective when a currency moves in a trading range. With this in mind, investors and traders should first identify currencies that display some trending characteristics before attempting to analyze with moving averages. This process does not have to be a scientific examination. Usually, a simple visual assessment of the price chart can determine if a security exhibits characteristics of trend.
In its simplest form, a currency’s price can be doing only one of three things: trending up, trending down or trading in a range. An uptrend is established when a currency forms a series of higher highs and higher lows. A downtrend is established when a currency forms a series of lower lows and lower highs. A trading range is established if a currency cannot establish an uptrend or downtrend. If a security is in a trading range, an uptrend is started when the upper boundary of the range is broken and a downtrend begins when the lower boundary is broken.
Once a currency has been deemed to have enough characteristics of trend, the next task will be to select the number of moving average periods and type of moving average. The number of periods used in a moving average will vary according to the currency's volatility, trendiness and personal preferences. The more volatility there is, the more smoothing that will be required and hence the longer the moving average. There is no one set length, but some of the more popular lengths include 21, 50, 89, 150 and 200 days as well as 10, 30 and 40 weeks. Short-term traders may look for evidence of 2-3 week trends with a 21-day moving average, while longer-term investors may look for evidence of 3-4 month trends with a 40-week moving average. Trial and error is usually the best means for finding the best length. If there are too many breaks, lengthen the moving average to decrease its sensitivity. If the moving average is slow to react, shorten the moving average to increase its sensitivity. In addition, you may want to try using both Simple and Exponential Moving Averages. Exponential Moving Averages are usually best for short-term situations that require a responsive moving average. Simple Moving Averages work well for longer-term situations that do not require a lot of sensitivity.
Moving averages can be effective tools to identify and confirm trend, identify support and resistance levels, and develop trading systems. However, traders and investors should learn to identify currencies that are suitable for analysis with moving averages and how this analysis should be applied. Usually, an assessment can be made with a visual examination of the price chart, but sometimes it will require a more detailed approach.
The advantages of using moving averages need to be weighed against the disadvantages. Moving averages are trend following, or lagging, indicators that will always be a step behind. This is not necessarily a bad thing though. After all, the trend is your friend and it is best to trade in the direction of the trend. Moving averages will help ensure that a trader is in line with the current trend. However, markets, currencies spend a great deal of time in trading ranges, which render moving averages ineffective. Once in a trend, moving averages will keep you in, but also give late signals. Don't expect to get out at the top and in at the bottom using moving averages. As with most tools of technical analysis, moving averages should not be used on their own, but in conjunction with other tools that complement them. Using moving averages to confirm other indicators and analysis can greatly enhance technical analysis.
USD - Dollar Foresees a Bearish Trading Session
The U.S currency continued to slip against the EUR yesterday, dropping 1.1% to as low as 1.3150. It also lost ground against many of its other major currency pairs as investors continue to worry about the depth of the U.S. recession. Analysts anticipate the Dollar to slip further and to make a correction against the major currencies in the short-medium term as many forex traders believe that the USD is overvalued.
The release of the U.S. Existing Home Sales Report yesterday added to downward pressure on the USD. The report showed that sales of U.S. existing homes fell by 3% in March to a 4.57 million-unit annual rate. This data confirms that the U.S. housing market is still weak. Another report showed the number of Americans filing first-time claims for unemployment insurance rose by 27,000 last week to 640,000 as forecast, while total benefit rolls reached a record, indicating the continuous deterioration of the U.S. labor market.
Later today, there are several important economic data releases coming out of the U.S. The most important of these publications is the Core Durable Goods Order indicator at 12:30 GMT. The release is expected to be lower than the previous figure, meaning the USD could continue its bearish behavior today. Traders should pay close attention to the market as there is an opportunity for traders to capitalize on the fluctuations which are likely to follow this release.
EUR - EUR Soars vs. the Dollar
The EUR rallied yesterday against the Dollar as encouraging news about the European economy and banking system sparked hope that the 16-country Euro-Zone may be emerging from the depths of recession. The EUR touched a one-week high versus the Dollar and closed at 1.3150. The European currency finished 100 pips higher against the JPY to finish yesterday's trading session at the 128.00 level.
The Euro-Zone's manufacturing and services sector recorded their best performance in 6 months, while industrial orders fell by less than analysts had anticipated. The survey showed a significant improvement, thereby boosting hopes that the rate of decline in the Euro-Zone economy is now moderating after a particularly torrid 4th quarter of 2008 and 1st quarter of 2009. The reduced contraction in manufacturing activity in April suggests that the sector is starting to benefit from the massive de-stocking that has taken place.
Today, there are many news events coming out of the Euro-Zone and Britain. From the Euro-Zone, investors are advised to follow the French Consumer Spending and German Ifo Business Climate figures that are set to be released at 6:45 and 8:00 GMT respectively. Britain is also set to release Retail Sales figures at 8.30 GMT. The results of these data releases are likely to set the pace for the EUR and Pound in today's trading.
JPY - Yen Declines as the Japanese Economy Plummets
Japan sank deeper into recession in the 1st quarter since Toyota, Honda and Nissan, Japan's three biggest automakers, slashed production last month. Japanese automakers have pared production as the global recession and rising unemployment sap demand for vehicles worldwide. Having reduced inventory, and with governments taking steps to revive demand, some carmakers, including Toyota and Nissan, are now planning to ease cuts.
As a result of negative economic news that came out of Japan yesterday, the JPY finished yesterday's trading session lower against several of its major currency pairs. This was seen against the EUR, pushing the EUR/JPY pair to 128.55. Also, the Yen fell against the GBP, as the pair closed at 0.8960.
Looking to today, the Yen may continue its downward slide against its major currency pairs as Japanese investors seek short-term profits from the Japanese stock market.
OIL - Crude Oil Eyes $50 a Barrel
Crude Oil rose 1.6% yesterday as the Dollar dropped against its major currency pairs, bolstering the appeal of commodities. In addition, Oil's gains came despite swelling U.S. crude inventories, which hit a fresh 19-year high last week. Prices rose around $1 to $49.70 per barrel, but have dropped from last week's high of above $52 a barrel. The Energy Information Administration (EIA) stated that Crude Oil supplies rose by 3.9 million barrels in the week ending April 17, marking the sixth weekly gain in a row.
Over the past four weeks, Americans consumed on average of 18.5 million barrels a day of petroleum products, a decline of 6.5% from the same period a year earlier, despite the dramatic plunge in Oil prices from peaks above $147 a barrel in July 2008. If demand of Crude continues to decline, then this will lead to continuing downward pressure on the price of Crude in the short-medium term.
Article Source - Dollar's Strength Set to Determine Oil Prices Today
What is Forex?
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 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.
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!