4.07.2009

Australian Dollar Rallies as Central Bank Signals End to Interest Rate Cuts (Euro Open)

The Australian Dollar surged 0.8% against its US counterpart late into the overnight session despite a surprise 0.25% reduction in benchmark borrowing costs as the Reserve Bank of Australia hinted an end to further interest rate cuts for the time being. The Euro and the British Pound extended losses against the greenback as Asian stock markets followed Wall St lower.

Key Overnight Developments

• Bank of Japan Keeps Rates at 0.10%, Expands Loan Access Programs
• Australian Dollar Rallies as Central Bank Signals End to Interest Rate Cuts

Critical Levels



The Euro extended losses in overnight trading, slipping as much as -0.7% against the US Dollar. The British Pound followed suit, shedding -0.9% to the greenback as Asian stock markets slipped lower on renewed concerns about the state of the global economy. The US Dollar has been trading inversely with stock prices in recent months, reflecting a perception of the currency as a safe-haven asset amid global economic and financial turmoil.

Asia Session Highlights



As expected, the Bank of Japan kept interest unchanged at 0.10%. Rather, policymakers said they will bolster current liquidity-boosting measures by expanding the range of assets acceptable as collateral for loans. As for the bank’s assessment of current economic conditions, traders were given a familiar mantra with the BOJ saying that the economy has deteriorated “significantly” and will continue to do so “for the time being”. Although the BOJ still expects the economy will begin to recover late into the 2009 fiscal year (Winter-Spring, 2010), the level of uncertainty about the forecast remains “high”. Further, members of the monetary policy body expressed concern about “downside risk of inflationary expectations”, alluding to the possibility of deflation. This could prove disastrous for the world’s second-largest economy as consumers and businesses perpetually put off spending and investment to wait for the best possible bargain, sinking the economy still deeper into recession.

The Reserve Bank of Australia surprised the markets, cutting benchmark interest rates 25 basis points to bring borrowing costs to 3.00%. Importantly, RBA Governor Glenn Stevens reiterated that the Australian economy is contracting less severely than that of its main trading partners and expressed confidence that while growth will likely continue to decline over the rest of the year, the “major change” in both monetary and fiscal policy will “provide significant support to domestic demand over the period ahead.” Most notably, Stevens conspicuously did not include any reference to revisiting the possibility of additional cuts in upcoming policy meetings, suggesting the central bank has reached the end of its easing cycle. The Australian Dollar initially stumbled as the announcement crossed the wires but quick rebounded to add 0.8% against its US counterpart as traders priced in the reduction in rate cut expectations.

Euro Session: What to Expect



UK Industrial Production is expected to have dropped -12.5% in the year to February, the largest decline since records began in 1976. The industrial sector employs over 18% of Britain’s labor force and produces the bulk of the country’s exports, making it both essential to a lasting recovery in economic growth and highly sensitive to the current slump in global demand. The outlook is likely to remain grim in the months ahead as the largest global recession since the Second World War continues to weigh on overseas sales, keeping the lid on economic growth. Indeed, GDP is seen shrinking -3.3% through 2009, the deepest contraction among the G7 nations according to forecasts from the International Monetary Fund. For their part, the Bank of England is expected to keep benchmark interest rates on hold at 0.50% but will almost certainly announce further quantitative easing measures to check the slide in output.

Moving to the continent, the final revision of the Euro Zone’s Gross Domestic Product is set to confirm that the currency bloc’s economy shed -1.5% through the fourth quarter of last year. Yesterday, February’s Producer Prices fell more than economists expected, showing wholesale inflation was shrinking at an annual pace of -1.8%, the most in a decade. Despite tumbling prices and deepening recession, the European Central Bank cut interest rates less than economists expected last week. In the press conference following the initial announcement, bank president Jean-Claude Trichet said rates had not reached “the lowest limit” and revealed that “the Governing Council intends to decide on further non-standard measures at our next monetary policy meeting”.

Written by Ilya Spivak, Currency Analyst
Article Source - Australian Dollar Rallies as Central Bank Signals End to Interest Rate Cuts (Euro Open)
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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.

Currencies

Currencies
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!