5.01.2009

Dollar, Stocks And Risk Appetite Reaction To Fed's Stress Test May Not Be Straightforward

• Dollar, Stocks And Risk Appetite Reaction To Fed’s Stress Test May Not Be Straightforward
• US 1Q GDP Sets A Disappointing Precedence For Global Growth
• Yields Continue To Contract With The RBNZ Cut Lowering The Ceiling On A Key FX Rate

The steady and relatively unimpeded rise in risk appetite over these past few months may have finally been put off its pace. After a bout of high volatility that coincided with heavy event risk, the markets seem to have lost their clear bias with momentum receding and the fundamental outlook for global growth and financial markets growing more complicated. This time around, traders and investors may require a tangible source of support to bolster their exposure while the future of risk and reward are still unbalanced. Taking measure of the market’s health though, there are a few irrefutable improvements in general conditions. The key improvement comes through the DailyFX Volatility Index. Though this indicator ticked higher week-over-week; at 13.7 percent, the forecasted range of price action over the next three months is nonetheless just off its lowest levels since the September (just before the panic that led to the panic sell off in equities and a deleveraging for so many other asset classes). This is a trend that cannot be ignored as its consistency reflects an underlying improvement in a critical component of the risk/reward equilibrium. For the potential yield or return side of that same equation, the forecast is not as bright – yet. Benchmark interest rates among some of the highest yielding currencies continue to fall and will do so until there is a genuine economic recovery underway. In the meantime, the global rates will trend closer and closer to zero and subsequently close the gap (or carry) along the way. However, we have seen in this market, things can change on a dime.

How risk appetite (or aversion) develops is becoming more and more a factor of sentiment rather than a natural response to fundamentals. The effects of recession are familiar to nearly every market participant; but policy officials, economists and speculators are quickly coming to a consensus that the global economy is beginning to stabilize and is likely to recover sometime at the end of this year or into the beginning of 2010. At the same time, the slighter than expected improvement in the pace of the United States’ recession through the first quarter certainly pushed this outlook back somewhat. As further growth readings from the industrialized and emerging markets cross the wires, the outlook will find further adjustments. Expansion and economic activity are inherently a platform for returns. As such, the timing of the eventual recovery will play a significant role in how quickly the rebound for speculation will be. Should the correction happen immediately, there will still be substantial yield differentials to work with and spur investment. However, with each month that passes, income producers like the Australian and New Zealand dollar will see their rates steadily depreciate. And, while there demand for return is on the rise, we cannot completely write off risk. After months of stability in the capital and credit markets, we are coming on the next major threat to calm: the Fed Stress Test. Initial reports suggest six of the 19 banks under review will come up short and be forced to raise capital. How will the market react to this? Is another collapse inevitable? Time will tell.

Written by John Kicklighter, Currency Strategist
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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!