Euro Unlikely to Find Support Despite Improving ZEW Survey (Euro Open)

The Euro is unlikely to be supported despite expectations that the ZEW Survey of investor confidence will issue the first positive reading since July 2007 as recent data suggests the metric’s forward-looking nature makes it a contrarian indicator at major tops and bottoms in the exchange rate. Meanwhile, continued weakness in inflation data will add to selling pressure as German PPI falls to a 5-year low.

Key Overnight Developments

• RBA’s Governor Stevens Says Australia is In Recession
• External Forces Bled Into Australian Economy, RBA Minutes Suggest
• Australian Dollar Marches Ahead After Violent Drop

Critical Levels

Asia’s trading saw the Euro confine itself to a tight range against the U.S. Dollar after a wild American session drove the pair aggresively southward. Volatility struck the British Pound as it plummeted by as much as 69 pips in a single 10 minute period against the greenback. Ultimately the pair recovered to trade near the day’s starting point.

Asia Session Highlights

In a speech given by Reserve Bank of Australia Governor Glenn Stevens, the Governor stated that Australia’s economy was indeed suffering from a recession. Citing increased Chinese output in the coming months, Stevens suggested that his country’s situation would rebound strongly. “There remains good ground to think that we will continue to weather the storm better than most,” he stated. Stevens’ remarks evoke a them habitually emphasized by the RBA – that the mechanism allowing the fluid transition of money from the central bank to its end users works best in Australia.

Minutes of the Reserve Bank of Australia’s Apr. 7 meeting showed that the institution cut rates due to weaker-than-anticipated domestic demand and labor data. Governor Glen Stevens and company felt that the deterioration of the jobs market would substantially lessen pressure on prices. External developments led to a “very sharp contraction in the global economy,” the minutes show. Additionally, a “weaker labour market was seen as increasing the likelihood of a decline in inflation over the medium term.”

The Australian Dollar recovered some of its losses during Asia’s session. After dipping my as much as 17 pips the currency reversed course to a high of 0.7012.

New Zealand’s Visitor Arrivals for March fell by -0.5% after a strong Kiwi rose as much as 13% and made it more costly for foreigners to travel to the South-Pacific country.

Euro Session: What to Expect

German Producer Prices are expected to shrink for the fifth consecutive month in March to bring the annual pace of wholesale inflation to just 0.1%, the lowest in 5 years. The reading implies continued downward pressure on consumer prices (the headline inflation gauge) – both in Germany and Euro Zone as a whole – as producers pass on lower manufacturing costs via cheaper finished goods. Germany’s annualized CPI has already fallen to a 17-year low at 0.5% while that of the broader Euro region slowed to 0.6%, the lowest since the introduction of the single currency. Rapidly cooling price growth adds another layer of anxiety for traders and policymakers alike: although ECB President Jean-Claude Trichet and at least one of his acolytes have already done a fair share of talking down market expectations for May’s interest rate announcement, the reality of the situation continues to leave room for substantial volatility. The ECB’s preference for a “measured approach” to monetary stimulus amid deepening recession and in spite of a credible deflationary threat is drawing increasing accusations of inadequacy, a trend that is sure to be amplified by rising unemployment levels as the crisis wears on. Trichet’s visibly defensive rhetoric is not helping matters, legitimizing calls to free national monetary capabilities from the ECB’s lackadaisical posture and thereby threatening the very existence of currency union itself. The central bank delayed the day of reckoning by promising a final decision on quantitative easing when rates are announced in May – if that summit sees more waffling, the Euro could succumb to a significant acceleration in selling pressure as traders price in a longer path to recovery as well as the political implications of inaction.

Separately, the ZEW Survey of investor confidence is expected to rise to 2.0 in April from -3.5 in the preceding month, the first reading in positive territory since July 2007. That said, the reading is unlikely to give much boost to the single currency: the ZEW reflects the forward-looking perspective of the survey respondents has led the Euro exchange rate by a significant margin. The trend in the Expectations component is inverts major tops and bottoms in the exchange rate. Specifically, the ZEW began to trend lower in the beginning of 2006 and bottomed out in July of last year; the same end-points mark the beginning of the last major uptrend in EURUSD that saw the pair test record highs above 1.60. If the same dynamic is to continue to hold, traders can expect the latest bout of Euro weakness to bottom as the ZEW tops out, a scenario unlikely to materialize at least this year.

In the UK, the Consumer Price Index is set to show annual inflation slowed 2.9% in the year to March, the lowest in two years. NIESR, a think tank, has said the economy shrank 1.5% in the first quarter and could “continue to decline for up to another year,” signaling continued downward pressure on the pace of price growth in the months ahead. That said, an upside surprise is not out of the question if the metric follows a similar pattern to February’s release: consumer prices unexpectedly rose as the depreciation in the British Pound made foreign-made products more expensive for UK consumers. Indeed, sterling slipped -3.4% against a trade-weighted basket of top currencies through March and a hefty -20.2% from the year before.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Unlikely to Find Support Despite Improving ZEW Survey (Euro Open)
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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

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