5.08.2009

Immediate Risk Appetite, Dollar, Stock Response To Fed Stress Test A Sign Of Optimism?

• Immediate Risk Appetite, Dollar, Stock Response To Fed Stress Test A Sign Of Optimism?
• Bank of England And European Central Bank Struggling To Keep Pace
• What Happens When Speculation Turns To Fundamentals For Support?

Investors and traders have waded through the most densely-packed week for event risk in months; and the initial report is that optimism has held up well despite a relatively dour mix. However, until fundamentals catch up to (and support) sentiment, the recovery will be built on unstable ground. The recent tempered pace of what is now a two-month recovery in risk appetite may be a sign that investors are slowly coming to this realization – though recent ‘better than expected’ data and performance gauges have kept the various asset classes from faltering under the weight of a weak backdrop. With headlines covering smaller than expected quarterly losses for major companies and signs of a slower contraction in the global economy, side-lined market participants have been encouraged to put their capital back to work in traditional securities. The benchmark Dow has pushed to near-four month highs in a 30 percent advance from its 12 year lows. The same sentiment is reflected in the currency market. A quick recovery in carry interest has brought the Index up to its highest level since the short-term rebound following the market crash back in October. As far as support goes, a measured recovery in investment levels and yield appetite is warranted through a steady reduction in risk and very early signs of a recovery in rates of return. Volatility in the deeply liquid currency market has pulled back to levels not seen since September and the interest rate outlook for the Australian dollar has just recently ticked higher. On the other hand, market sentiment is still recovering from a near panic state and returns on every other asset are contacting. So, is sentiment overshooting the actual recovery?

Whether the current recovery in optimism and investment levels continues into the medium term will become more and more a factor of fundamentals. A natural boost in the markets is natural as participants reinvest and early speculators trying to jump back in the market to make up for their crushing losses through 2008. However, such sentiment can prevail for only so long before investors are discouraged by the lack of a return over benchmarks and risk-free instruments – or are driven away by another unforeseen shock to the financial system. For this week, another leg of the recovery has been won through the relief provided by the results of the Federal Reserve’s Stress Test. Despite the government’s requirement for 10 of the United States’ largest banks to raise another $74.6 billion dollars and forecasts that 19 of its institutions could see a combined $600 billion in additional losses through 2010; investors were calmed by the fact that things weren’t worse. However, this data shows a fundamental issue. Further losses are inevitable. More importantly, global growth is fully expected to contract going forward. At the most fundamental level of finance, returns are borne from economic expansion and the lending and investing it generates. With both the BoE and ECB reporting their efforts to shore up the markets this past week and government funds still holding things together, it is clear that a recovery can’t yet support itself.

Written by John Kicklighter, Currency Strategist
Article Source - Immediate Risk Appetite, Dollar, Stock Response To Fed Stress Test A Sign Of Optimism?
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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!