USD - Dollar Plummets as Wall Street Rallies
The Dollar plummeted against the major currencies on Monday, as Wall Street rallied. The bullishness in the U.S. stock market also spread to Britain and the Euro-Zone. The Dow Jones rose by over 1%, while the S&P extended its best rally since 1998. Amongst the biggest gainers were banking stocks. The bullish stock market led to a fall in the Dollar across the board, as traders ditched the safe-haven USD for riskier assets in Monday's trading. This was exasperated due to traders wishing to further their profits in stocks as the quarter comes to an end.
The USD slipped about 80 pips vs. the EUR to finish trading at 1.4115. This was helped as Euro-Zone economic confidence increased more than expected this month. The Dollar's behavior was much the same against the Pound, as the GBP/USD pair rose 160 pips to the 1.6634 level. The GBP's strength may have been owed to its dependence on U.S. economic optimism. However, against the JPY the greenback extended its rally for the second day, as investors dropped the "ultra" safe-haven Yen for the "less" safe-haven USD.
Looking ahead today, there is plenty of economic news that is likely to help determine the volatility in the forex market. The releases from the U.S. are set to be the key to today. Traders are advised to pay attention to the Chicago PMI at 13:45 GMT and CB Consumer Confidence at 14:00 GMT. It is also advisable to follow the direction of the equity market, as this could be a key factor in determining the Dollar's strength later.
EUR - GBP Boosted by U.S. Optimism
The Pound recorded a volatile, but bullish trading session yesterday against its major crosses, as it benefited from the optimism from the U.S. The rally in the British stock market was encouraged by Wall Street's rally. What has been much of a pattern recently has seen the Pound rising whenever equities make significant gains in the U.S. and Britain. This may be explained by Britain's dependence on the financial sector. With this sector doing well yesterday in the equities market lent the Pound a boost, helping us understand much of the behavior of the cable.
Both the GBP and EUR posted gains against the USD and JPY. The EUR/GBP was
32 pips lower at 0.8482. It seems that if global economies continue to prove, then we may see this pair continue to approach the 0.8400 level in the short-medium term.
The EUR was also helped yesterday by strong economic confidence figures from the Euro-Zone. This is a further signal that the economic situation in the Euro-Zone isn't as dire as some analysts originally forecast.
Today, there is plenty of data coming out of Britain and the Euro-Zone that is likely to determine the GBP and EUR crosses in today's trading against the major currencies. From Britain there is the release of the Nationwide HPI at 6:00 GMT and Current Account and GDP data at 8:30 GMT. From the Euro-Zone there is the publication of German Unemployment Change figures at 7:55 GMT and the CPI Flash Estimate at 9:00 GMT.
JPY - JPY Tumbles on Waning Safe-Haven Status
The Japanese Yen tumbled on Monday, as the Japanese and global equities recorded significant gains. Investors also lost confidence in the JPY yesterday, as Japan released figures showing that unemployment is at a 5-year high of 5.2%. Japan's government fears it will hit 6% by mid-2010. Much of the JPY's weakness is due to
traders dropping the safe-haven JPY for more risky assets. As of late, this seems to be equities and commodities.
The Yen slid for a second day against the USD by about 50 pips to 95.92. The EUR/JPY cross slipped to135.38 from 133.90. Against the GBP, the Yen slipped 235
pips to 159.63. The Yen's volatile movement is set to continue in today's trading. Later today, this will be even more so with the release of the important Japanese Tankan Manufacturing Index and Tankan Non-Manufacturing Index at 23:50 GMT.
Crude Oil - Crude Oil Surges Past $72 a Barrel
The price of Crude Oil surged passed $72 a barrel yesterday, rising an astonishing $4
to $72.68. This was fueled by 3 dominant factors. Firstly, there was yet another rebel attack in Nigeria, forcing the Shell Oil Company to close one of its refineries yesterday. Additionally, there was a bullish U.S. and European stock market session, leading to a boom in commodities, as investors sold-off safe-haven assets such as the U.S. Dollar.
Yesterday's gains came on the back of some bearishness in Crude in recent days, as the commodity failed to hold above $70 a barrel. Recent reports by the International Energy Agency revealed that demand will wane for the foreseeable future. However, OPEC is unlikely to cut supply in their next meeting in September. If there are more positive economic signs from the U.S. in the next 2 days, then Crude could hit $75 by the end of the week.
Article Source - Rally in Equities Pushes Investors to Riskier Assets
Key Overnight Developments
• Japanese Economy Sheds 440k Jobs, Unemployment Rate Rises
• Australian Lending to Private Sector Unexpectedly Fell in May
• US Dollar Slumps as Stocks Extend Gains in Asian Trading
The Euro and the British Pound advanced in overnight trading, adding as much as 0.4% and 0.6% against the US Dollar, respectively. The greenback fell in overnight trading as Asian stock markets extended the rally seen on European and US exchanges, sapping demand for safety-linked currencies.
Asia Session Highlights
Japan’s labor market continued to deteriorate in May: the economy shed a staggering 440k jobs, pushing the Jobless Rate to 5.2%, the highest in over 5 years. Meanwhile, the ratio of available vacancies to job-seekers fell to 0.44, the lowest since records began in 1963. Continued job losses will weigh on disposable incomes and trimming spending. Indeed, retail trade came to a standstill in May while minutes from the last meeting of the Bank of Japan has said that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.” While Household Spending unexpectedly rose 0.3%, the first increase in 15 months, the improvement is unlikely to be sustainable and likely owes to the temporary boost from the government’s record-setting $25 trillion yen stimulus package as well as the rebound in share prices (the Nikkei benchmark index has surged 42% to date since early March).
Separately, the Nomura/JMMA Manufacturing PMI figure rose for the fifth consecutive month in June, printing at 48.2. A reading below the 50 “boom-bust” level that suggests the manufacturing sector continues to decline, but at the slowest pace since January. It is quite telling that companies continue to cut jobs even as PMI figures improve, suggesting any improvements in recent data owe to inventory adjustments rather than a meaningful recovery. The dismal outlook for global trade in 2009 and 2010 means that export-oriented Japanese firms are likely to keep output level low and labor forces lean, making any sustainable rebound in GDP growth a distant prospect for the world’s second-largest economy.
Australia’s Private Sector Credit unexpectedly shrank in May, falling -0.1% versus forecasts of a 0.2% expansion. The annual pace of credit growth fell to 3.9%, the lowest in over 15 years. Loans to businesses fell -0.7%, the most since December 2008, hinting that companies are delaying expansion plans and suggesting that unemployment will remain a concern in the months ahead. Indeed, a survey of economists conducted by Bloomberg calls for the jobless rate to hit 5.9% this year and top 7% in 2010.
Euro Session: What to Expect
The final revision of UK Gross Domestic Product is expected to reveal the economy shrank -2.1% through the first quarter, a greater contraction than the originally-reported -1.9% decline. In annual terms, GDP is expected to have shrunk at a pace of -4.3%, the fastest in at least 53 years. The most recent GDP forecast from NIESR, a think tank, suggested the turmoil may slow in the second quarter of the year, predicting that March was “the trough of the depression, with output rising in April and May.” A validation of such an outlook in the forthcoming data would surely lift a great deal of pressure from the shoulders of policymakers who have effectively exhausted most stimulus options. Indeed, the government is unlikely to offer much more of a boost with the fiscal gap expected to reach a whopping 14% of GDP by next year, while the central bank has already slashed rates to a meager 0.5% and embarked on quantitative easing. On balance, consensus economic growth forecasts suggest that the UK will trail behind the US but outpace the Euro Zone through the end of 2010, suggesting the Bank of England will follow the Fed but lead the ECB in lifting interest rates as the recovery takes hold. All told, this points to a bearish bias for both GBPUSD and EURGBP in the months ahead.
Turning to the Euro Zone, a preliminary estimate of the Consumer Price Index is expected to show that prices shrank at an annual pace of -0.2% in June, the first negative reading on record since the creation of the single currency in 1991. The latest PPI report supports continued pressure on consumer prices, with forecasts calling for wholesale inflation to shed -5.6% in the year to May. Entrenching expectations of lower prices threatens to commit the currency bloc to a long-term period of stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment. German labor-market figures are also on tap, with expectations calling for the EZ’s largest economy to shed 45k jobs in June to push the Unemployment Rate back to a 16-month high at 8.3% after the metric slipped to 8.2% in the previous month. Job losses will weigh on consumer spending, the largest contributor to overall economic growth, keeping a lid on any substantive recovery in GDP growth in the months ahead. The prospect of deepening recession and an increasingly credible deflationary threat have boosted expectations that the European Central Bank will cut interest rates later this week, with overnight index swaps suggesting the market now sees a 56.5% chance of a 0.25% reduction.
Rounding out the session, the UBS Consumption Indicator that aims to forecast the trend in private spending in the coming 3-4 months is likely to fall to a fresh 4-year low in May as the pace of unemployment continues to push higher, ticking up to a seasonally-adjusted rate of 3.5% in the same period for the first time since March 2006.
Written by Ilya Spivak, Currency Analyst
Euro, British Pound Gains Threatened with Key GDP, CPI Data on Tap (Euro Open)
Debate about an alternative international currency has heated up in recent months and central bankers gathering in Basel this weekend also discussed the dollar's role. Still, the dollar will keep its role as reserve currency, as China is unlikely to change the composition of its foreign currency reserves any time soon. That's dollar positive analysts said.
USD - USD Up despite Recent Downward Pressures from Abroad
The US Dollar, after dropping last week due to renewed calls from China and Russia to switch to an alternate reserve currency, began to steadily strengthen in today's early morning hours. From a peak high above 1.4100 against the EUR, the USD has pared some of these losses and is currently trading just above 1.4000. Versus the British Pound, the greenback has gone from 1.6550 back towards 1.6450, remaining within the range this pair has experienced over the previous 2 weeks.
While China's recent call for a new international reserve currency, and Russia's support of such an action, has put downward pressure on the USD lately; the impact has been somewhat muted. It has been forecast a number of times that the greenback will begin to depreciate against most currency pairs as the global economy recovers. As one of the world's leading safe-haven investments, the Dollar will no doubt take a hit from an increase to risk appetite which naturally stems from economic recovery.
China and Russia added to this weight with a call for portfolio diversification, which in fact carries roughly the same impact as calling for the purchase of riskier assets. For economic giants, such as these two countries, to call for a diversion away from the largest economic rival is a basic economic weapon aimed at gaining a larger market share. The problem is that they lay out a general economic plan which is already understood to be in motion. This is why the impact was muted, and why the USD will still experience multiple up-ticks in the near future.
Looking forward to today's trading, however, will see traders with little economic news to wager on for the US Dollar. Britain and Japan appear to be releasing the bulk of today's news, which means we may see a day of trading with low liquidity and increased volatility. Day-traders can take advantage of these intense trading days by swinging within the larger-than-normal price fluctuations.
EUR - EUR's Mixed Results due to High Optimism, Bleak Data
The EUR has been uncertain in its direction lately, despite clear calls for a buy-up of this higher-yielding currency during times of mild economic optimism. Positive news from the Euro-Zone typically leads to an increase to risk appetite, which is definitely something which traders saw last week. The EUR started Friday just under 1.40 against the USD, but steadily rose above 1.41 before the end of last week's trading. The EUR even peaked around 0.8550 against the Pound, despite the moderate drop towards 0.8520 at the end of Friday's trading session.
Many of the economic indicators being released these past 2 weeks have shown that the Euro-Zone is experiencing a boost in consumer optimism. This has come about despite a growth in budget deficits and continuously shrinking manufacturing output and GDP. The people have started looking forward to better days, but the numbers still tell a bleak story. One of the primary impacts of such data is that the EUR has showed heavy signs of a comeback, but fraught with nasty downturns as its rivals make headway from periods of instability.
As for this week, the 16-nation currency has leveled-off in today's early trading sessions, but it appears to be poised for a rather sharp movement today or tomorrow. The EUR looks to be consolidating towards significant price barriers against most of its currency rivals and will either go through a massive drop or, more likely, strengthen as economic indicators continue to show a growth in optimism, and possibly a chance to poke holes in the USD's most recent gains. Traders should pay attention to the few economic indicators released today as the story is being told solely by Europe and Great Britain. With a silenced US economy, we could see much more predictable price movements from the European currencies.
JPY - Yen Declining as Consumer Spending Expected to Fall
Despite the grueling downward trend the JPY experienced last week against its currency counterparts, the Yen now appears to be flattening out. The only currency which seems to have bested the Yen in today's early morning hours is the USD which has climbed from 95.15 to the 95.50 level, with the possibility of reaching 95.80 in the coming hours. Against the EUR and GBP, the Yen has done very little in terms of price movement, consolidating towards the price of 138.90 and 157.30, respectively.
As industrial production in Japan rises for 3 consecutive months, there are some analysts who forecast a faster-than-anticipated recovery for the island economy. On the other hand, consumer spending in Japan has typically played a large part in economic growth, but these figures are expected to continue plummeting this week. Also putting mild pressure on the JPY is the fact that unemployment in Japan has finally reached over 5% and is still climbing. With such negative economic news it is hard to expect a strong recovery in the Yen anytime soon.
OIL - Oil Prices Still Failing to Stay above $70
No matter how much downward pressure there appears to be on the value of the US Dollar, the price of Crude Oil still seems to have difficulty finding support above $70 a barrel. Dropping from over $71 to as low as $69 last Friday, the price of the black gold has continued its plunge in today's early trading hours and currently sits near $68.50 a barrel.
As expectations for fuel and energy demand have been decreased these past weeks, many speculators are now beginning to price in the reality that oil prices may not find the support necessary to climb successfully above $70 in the nearest future. Without a sudden short-fall in supply, the price will no doubt reflect this reality. Traders may anticipate a series of fluctuations above and below the $70 price range as the market searches for a true range of the value of Crude Oil.
Article Source - Dollar Rises on Reserve Currency Debate
Key Overnight Developments
• New Zealand Trade Deficit Narrows as Imports Fall Most in 16 Years
• Japanese Retail Trade Stalls in May on Rising Unemployment
• US Dollar Surges as China Backtracks on ‘Super-Sovereign Currency’
The US Dollar surged in overnight trading after China’s central bank chief Zhou Xiaochuan said his country’s foreign exchange reserve policy is “quite stable”, alluding to the fact that the world’s largest holder of US Treasuries will not be diversifying away from the greenback for the time being. China’s call for a ‘super-sovereign’ currency weighed on USD last week. The Euro tested as low as 1.4002 while the British Pound touched 1.6450 ahead of the opening bell in Europe.
Asia Session Highlights
New Zealand’s Trade Balance deficit narrowed more than was expected in May, shrinking to -NZ$3.04 billion from -NZ$4.1 billion in the previous month. Economists had forecast a -NZ$3.64 billion result ahead of the release. The improvement came as imports tumbled -20.7% from a year prior, the largest decline in over 16 years. The unemployment rate has surged to 6-year high at 5%, discouraging consumption, including that of imported goods. The result reinforces the dynamic we noted last week as first quarter current account figures crossed the wires, painting a picture of weak consumer demand that is made all the more ominous in the context of a 17.6% currency appreciation in the four months through May that would reasonably be expected to boost New Zealanders’ purchasing power of foreign goods. Private consumption accounts for 62.3% of overall economic growth and continued weakness in domestic spending makes it unlikely that the smaller antipodean nation can mount a meaningful recovery from the current downturn in the near term. Indeed, GDP shrank more than economists expected in the first quarter, contracting at the fastest pace in over three decades.
Japanese Retail Trade came to a standstill as expected in May after adding 0.6% in the previous month. In annual terms, receipts shrank at a rate of -2.8% for the second consecutive month, stalling a rebound from a record low at -5.7% recorded in February. The unemployment rate has advanced to the highest in over 5 years, weighing on disposable incomes and trimming spending. More of the same is likely in the months ahead as lackluster global demand keeps output levels low and labor forces lean. Indeed, minutes from the last Bank of Japan policy meeting saw policymakers note that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.”
Euro Session: What to Expect
Euro Zone Economic Confidence figures are expected to tick up in June, though as we have noted previously, some recovery in sentiment is to be expected as governments’ fiscal efforts filter into the broad economy; the big question at this stage is whether growth is sustainable after stimulus cash dries up. This suggests the Euro is likely to look past the data docket with near-term price action taking directional cues from trends in risk appetite, with EURJPY and EURUSD still 83% and 88% correlated with the MSCI World Stock Index, respectively.
Turning to the UK, Net Consumer Credit is set to remain at 0.3 billion pounds in May, unchanged from the previous month, while Mortgage Approvals grow by 46k, extending a rebound from record lows in November 2008 for the sixth month. The upswing may prove little more than a correction, however: Rightmove Plc reported last week that house prices fell for the first in five months in June as banks raised borrowing costs in anticipation of a stabilizing global economic environment, hinting that credit growth will stumble in the months ahead. Barring a sharp deviation from expectations, British Pound price action is unlikely to dwell too deeply on these releases, focusing on cues from stock and commodity markets to set directional momentum.
Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Surges as China Backtracks on 'Super-Sovereign Currency' Comments (Euro Open)
MACD, which stands for Moving Average Convergence Divergence, is a trend-following momentum indicator that shows the relationship between two moving averages of prices. Developed by Gerald Appel, MACD is one of the simplest and most reliable indicators available. This tool is used to identify moving average which indicate a new trend, regardless of whether it is bullish or bearish. After all, the most important priority in trading is to find a trend, because the most money revolves around it.
With MACD chart, you'll usually see three numbers that are used to configure it:
1. First is the number of periods that is used to calculate the faster moving average
2. Second is the number of periods that is used to calculate the slower moving average
3. Third is the number of candles that are used to calculate the moving average of the difference between faster and slower moving average
The lines on MACD charts are often misunderstood, two lines that are drawn are not the moving average of prices. They are the moving average of the difference between the two moving average.
In our example, the faster moving average is the moving average of the difference between 12 and 26 periods of moving average. Slower moving average outlines a previous average of MACD lines. We calculate the average of the last 9 periods of faster MACD line, and outline it as a slower moving average. This moderates the original lines, giving us a more accurate chart.
Histogram outlines the difference between faster and slower moving average. If you look at the above chart you will see that when the two moving averages separate, histogram becomes greater. This is called divergence, because the faster moving average is diverging from the slower moving average.
When the moving average lines come closer together, histogram becomes smaller. This is called convergence, because faster moving average is converging, coming closer to slower moving average. This is why this indicator is called the Moving Average Convergence Divergence.
The most popular formula for the "standard" MACD is the difference between 26-day and 12-day Exponential Moving Averages (EMAs). This is the formula that is used in many popular technical analysis programs and quoted in most technical analysis books. Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator, less prone to whipsaws.
Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line. A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish crossover occurs when MACD moves below its 9-day EMA. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.
MACD Bullish Signals
MACD generates bullish signals from three main sources:
1. Positive Divergence
2. Bullish Moving Average Crossover
3. Bullish Centerline Crossover
A Positive Divergence occurs when MACD begins to advance and the currency is still in a downtrend and makes a lower reaction low. MACD can either form as a series of higher Lows or a second Low that is higher than the previous Low. Positive Divergences are probably the least common of the three signals, but are usually the most reliable, and lead to the biggest moves.
Bullish Moving Average Crossover
A Bullish Moving Average Crossover occurs when MACD moves above its 9-day EMA, or trigger line. Bullish Moving Average Crossovers are probably the most common signals and as such are the least reliable. If not used in conjunction with other technical analysis tools, these crossovers can lead to whipsaws and many false signals. Bullish Moving Average Crossovers are used occasionally to confirm a positive divergence. A positive divergence can be considered valid when a Bullish Moving Average Crossover occurs after the MACD Line makes its second "higher Low".
Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days. The buy signal would then commence at the end of the third day.
Bullish Centerline Crossover
A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive territory. This is a clear indication that momentum has changed from negative to positive, or from bearish to bullish. After a Positive Divergence and Bullish Centerline Crossover, the Bullish Centerline Crossover can act as a confirmation signal. Of the three signals, moving average crossover are probably the second most common signals.
MACD generates bearish signals from three main sources. These signals are mirror reflections of the bullish signals:
1. Negative Divergence
2. Bearish Moving Average Crossover
3. Bearish Centerline Crossover
A Negative Divergence forms when the currency advances or moves sideways, and the MACD declines. The Negative Divergence in MACD can take the form of either a lower High or a straight decline. Negative Divergences are probably the least common of the three signals, but are usually the most reliable, and can warn of an impending peak.
Thee are two possible means of confirming a Negative Divergence. First, the indicator can form a lower Low. This is traditional peak-and-trough analysis applied to an indicator. With the lower High and subsequent lower Low, the uptrend for MACD has changed from bullish to bearish. Second, a Bearish Moving Average Crossover (which is explained below) can act to confirm a negative divergence. As long as MACD is trading above its 9-day EMA, or trigger line, it has not turned down and the lower High is difficult to confirm. When MACD breaks below its 9-day EMA, it signals that the short-term trend for the indicator is weakening, and a possible interim peak has formed.
Bearish Moving Average Crossover
The most common signal for MACD is the moving average crossover. A Bearish Moving Average Crossover occurs when MACD declines below its 9-day EMA. Not only are these signals the most common, but they also produce the most false signals. As such, moving average crossovers should be confirmed with other signals to avoid whipsaws and false readings.
Sometimes a currency can be in a strong uptrend, and MACD will remain above its trigger line for a sustained period of time. In this case, it is unlikely that a Negative Divergence will develop and a different signal is needed to identify a potential change in momentum.
Bearish Centerline Crossover
A Bearish Centerline Crossover occurs when MACD moves below zero and into negative territory. This is a clear indication that momentum has changed from positive to negative, or from bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior signal such as a moving average crossover or negative divergence. Once MACD crosses into negative territory, momentum, at least for the short term, has turned bearish.
The significance of the centerline crossover will depend on the previous movements of MACD as well. If MACD is positive for many weeks, begins to trend down, and then crosses into negative territory, it would be bearish. However, if MACD has been negative for a few months, breaks above zero, and then back below, it might be a correction. In order to judge the significance of a centerline crossover, traditional technical analysis can be applied to see if there has been a change in trend, higher High or lower Low.
Using a Combination of Signals
Even though some traders may use only one of the above signals to form a buy or a sell signal, using a combination can generate more robust signals which will increase your chances of catching a trend and generating a profit.
In 1986, Thomas Aspray developed the MACD-Histogram. Some of his findings were presented in a series of articles for Technical Analysis of Stocks and Commodities. Aspray noted that MACD's lag would sometimes miss important moves, especially when applied to weekly charts. He first experimented by changing the moving averages and found that shorter moving averages did indeed speed up the signals. However, he was looking for a means to anticipate MACD crossovers. One of the answers he came up with was the MACD-Histogram.
Definition and Construction
The MACD-Histogram represents the difference between the MACD and its trigger line, the 9-day EMA of MACD. The plot of this difference is presented as a histogram, making centerline crossovers and divergences easily identifiable. A centerline crossover for the MACD-Histogram is the same as a moving average crossover for MACD. If you will recall, a moving average crossover occurs when MACD moves above or below the trigger line.
If the value of MACD is larger than the value of its 9-day EMA, then the value on the MACD-Histogram will be positive. Conversely, if the value of MACD is less than its 9-day EMA, then the value on the MACD-Histogram will be negative.
Further increases or decreases in the gap between MACD and its trigger line will be reflected in the MACD-Histogram. Sharp increases in the MACD-Histogram indicate that MACD is rising faster than its 9-day EMA and bullish momentum is strengthening. Sharp declines in the MACD-Histogram indicate that MACD is falling faster than its 9-day EMA and bearish momentum is increasing.
On the chart above, we can see that the MACD-Histogram movements are relatively independent of the actual MACD. Sometimes the MACD is rising while the MACD-Histogram is falling. At other times, the MACD is falling while the MACD-Histogram is rising. The MACD-Histogram does not reflect the absolute value of the MACD, but rather the value of the MACD relative to its 9-day EMA. Usually, but not always, a move in the MACD is preceded by a corresponding divergence in the MACD-Histogram.
1. The first point shows a sharp positive divergence in the MACD-Histogram that preceded a Bullish Moving Average Crossover.
2. On the second point, the MACD continued to new Highs but the MACD-Histogram formed two equal Highs. Although not a textbook case of Positive Divergence, the equal High failed to confirm the strength seen in the MACD.
3. A Positive Divergence formed when the MACD-Histogram formed a higher Low and the MACD continued lower.
4. A Negative Divergence formed when the MACD-Histogram formed a lower High and the MACD continued higher.The first point shows a sharp positive divergence in the MACD-Histogram that preceded a Bullish Moving Average Crossover.
Thomas Aspray designed the MACD-Histogram as a tool to anticipate a moving average crossover in the MACD. Divergences between MACD and the MACD-Histogram are the main tool used to anticipate moving average crossovers. A Positive Divergence in the MACD-Histogram indicates that the MACD is strengthening and could be on the verge of a Bullish Moving Average Crossover. A Negative Divergence in the MACD-Histogram indicates that the MACD is weakening, and it foreshadows a Bearish Moving Average Crossover in the MACD.
The best use for the MACD-Histogram is in identifying periods when the gap between the MACD and its 9-day EMA is either widening or shrinking. Broadly speaking, a widening gap indicates strengthening momentum and a shrinking gap indicates weakening momentum. Usually a change in the MACD-Histogram will precede any changes in the MACD.
The main signal generated by the MACD-Histogram is a divergence followed by a moving average crossover. A bullish signal is generated when a Positive Divergence forms and there is a Bullish Centerline Crossover. A bearish signal is generated when there is a Negative Divergence and a Bearish Centerline Crossover. Keep in mind that a centerline crossover for the MACD-Histogram represents a moving average crossover for the MACD.
Divergences can take many forms and varying degrees. Generally speaking, two types of divergences have been identified: the slant divergence and the peak-trough divergence.
A Slant Divergence forms when there is a continuous and relatively smooth move in one direction (up or down) to form the divergence. Slant Divergences generally cover a shorter time frame than divergences formed with two peaks or two troughs. A Slant Divergence can contain some small bumps (peaks or troughs) along the way. The world of technical analysis is not perfect and there are exceptions to most rules and hybrids for many signals.
A peak-trough divergence occurs when at least two peaks or two troughs develop in one direction to form the divergence. A series of two or more rising troughs (higher lows) can form a Positive Divergence and a series of two or more declining peaks (lower highs) can form a Negative Divergence. Peak-trough Divergences usually cover a longer time frame than slant divergences. On a daily chart, a peak-trough divergence can cover a time frame as short as two weeks or as long as several months.
Usually, the longer and sharper the divergence is, the better any ensuing signal will be. Short and shallow divergences can lead to false signals and whipsaws. In addition, it would appear that Peak-trough Divergences are a bit more reliable than Slant Divergences. Peak-trough Divergences tend to be sharper and cover a longer time frame than Slant Divergences.
One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend in one indicator. As a trend-following indicator, it will not be wrong for very long. The use of moving averages ensures that the indicator will eventually follow the movements of the underlying security. By using Exponential Moving Averages (EMAs), as opposed to Simple Moving Averages (SMAs), some of the lag has been taken out.
As a momentum indicator, MACD has the ability to foreshadow moves in the underlying currency. MACD divergences can be key factors in predicting a trend change. A Negative Divergence signals that bullish momentum is waning, and there could be a potential change in trend from bullish to bearish. This can serve as an alert for traders to take some profits in long positions, or for aggressive traders to consider initiating a short position.
One of the beneficial aspects of the MACD is also one of its drawbacks. Moving averages, be they simple, exponential or weighted, are lagging indicators. Even though MACD represents the difference between two moving averages, there can still be some lag in the indicator itself. This is more likely to be the case with weekly charts than daily charts. One solution to this problem is the use of the MACD-Histogram.
MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels that historically represent overbought and oversold levels, MACD does not have any upper or lower limits to bind its movement. MACD can continue to overextend beyond historical extremes.
With the emergence of computerized analysis, it has become highly unreliable in the modern era, and standard MACD based trade execution now produces a greater distribution of losing trades. Some additions have been made to MACD over the years but even with the addition of the MACD-Histogram, it remains a lagging indicator. It has often been criticized for failing to respond in mild/volatile market conditions. Since the crash of the market in 2000, most strategies no longer recommend using MACD as the primary method of analysis, but instead believe it should be used as a monitoring tool only. It is prone to whipsaw, and if a trader is not careful it is possible that they might suffer substantial loss, especially if they are leveraged or trading options. Since Gerald Appel developed the MACD, there have been hundreds of new indicators introduced to technical analysis. While many indicators have come and gone, the MACD has stood the test of time.
Fundamental Outlook for US Dollar: Neutral
- US Dollar rallies on weaker S&P 500 following Fed rate decision
- Yet choppy risk sentiment just as easily sent Carry trades higher, US Dollar lower
- Technical studies show US Dollar breakout risk increasing
The US Dollar finished the week modestly lower against key counterparts, and an end-of-week dollar decline suggests that very short-term momentum favors further losses. Yet markets remain extraordinarily indecisive, and the lack of extended moves in the US dollar has left Euro/US Dollar and British Pound/US Dollar pairs in especially narrow ranges. A busy US economic calendar in the week ahead nonetheless promises potential fundamental impetus for major breakouts. Highly market-moving US Non Farm Payrolls numbers and other key economic releases could finally clarify economic outlook and establish much-needed direction in US dollar trading.
The infamous US Nonfarm Payrolls reports promises fireworks across US Dollar currency pairs, but earlier-week economic event risk could just as easily set the tone for the USD after several weeks of lackluster price action. First on the ledger, Tuesday’s Conference Board Consumer Confidence numbers are expected to show a modest improvement in domestic sentiment through the month of June. The survey’s headline index has improved dramatically after setting record-lows through February, but the number nonetheless suggests that consumers remain especially pessimistic on sizeable job losses and incredible wealth destruction. The question remains: is the worst of the economic crisis now over? The sharp turnaround in Consumer Confidence suggests the worst may be past us, but improving optimism has not resulted in increased spending—thereby having a limited effect on the US economy. Any further improvements in the Conference Board figures would be encouraging, but we will need higher confidence numbers to translate into increased consumption to truly claim that the worst of the recession is now over.
Next on the ledger, markets will watch for noteworthy results out of Wednesday’s ISM Manufacturing results. The ISM report will shed light on conditions in domestic industry, and it will be important to watch for continued signs of improvement in domestic demand. The survey’s New Orders and Production indices plummeted to record-lows through the end of 2008, but steady improvements actually left the New Orders index in positive territory for the first time since October, 2007 through May’s survey data. The encouraging signs certainly boosted outlook for domestic demand. Yet it remains key to watch for continued improvement to cement the case for a sustained turnaround in production. Given that the US Nonfarm payrolls report will be released the very next day, markets will likewise pay close attention to any noteworthy shifts in the ISM Manufacturing Employment index.
Last but most certainly not least, the Bureau of Labor Statistics will publish official estimates for job destruction/creation in the US economy in Thursday’s Nonfarm Payrolls report. The US economy has shed an incredible 7.0 million jobs since December, 2007, and forecasts call for a further 350,000 job losses through June. A much smaller-than-expected decline in May boosted market outlook for the US economy, but the data only tells us that the rate of job losses slowed—not that employment actually improved. To really boost the odds of economic recovery, NFP data will need to show much more dramatic improvements. Any signs of deterioration could just as easily dash hopes that the worst of the recession is now past.
Risky asset classes remain in a fragile state, and we continue to claim that the S&P 500 topped through the month of June. If risk sentiment takes a sharp turn for the worse, we could finally see the US Dollar make a sustained breakout against major counterparts. A busy economic calendar could prove to be the catalyst for a sustained turn, and it will be critical to watch financial markets in days ahead.
Euro Volatility Likely as Central Bank Delivers Interest Rate Decision
Fundamental Forecast for Euro: Bearish
- German IFO Rises for Third Consecutive Month in June
- ECB’s Trichet Says Current Interest Rates ‘Appropriate’
- OECD Says ECB Should Cut Interest Rates Near Zero
Euro volatility looks likely in the week ahead as the European Central Bank issues a highly contested interest rate decision. The central bank is facing mounting pressure to provide greater monetary stimulus, with the Paris-based Organization for Economic Cooperation and Development (OECD) urging the central bank to cut borrowing costs toward zero and keep them there into 2010 while Credit Suisse’s overnight index swap index reveals traders are now pricing in a 56.5% chance of a 25 basis rate cut, a sharp reversal considering they were reflecting a 62.7% chance of a rate hike just two days ago. Looking past the admittedly global phenomenon of dismal economic growth in 2009, arguably the most pressing reason to reduce the cost of money is to check the onset of deflation. An early CPI estimate is expected to show that prices shrank at an annual pace of -0.2% in June, the first negative reading on record since the creation of the single currency in 1991. The latest PPI report supports continued pressure on consumer prices, with forecasts calling for wholesale inflation to shed -5.6% in the year to May. Entrenching expectations of lower prices threatens to commit the currency bloc to a long-term period of stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.
For their part, a rotating cast of ECB officials including President Jean-Claude Trichet have said last week that current rates are “appropriate” for the time being, with perennial hawk Axel Weber saying the bank has “used the room for rate reductions that was created by waning inflation risks,” adding that “additional steps are not necessary.” Although the ECB did offer an unprecedented 442 billion euro in 12-month bank loans as a means of de-facto monetary easing and will also move forward with a 60 billion bond-buying scheme announced at the last policy meeting, these measures may prove woefully inadequate, as there is no guarantee that banks will lend out the funds raised from action and thereby stimulate the broad economy. Indeed, banks may chose to hang on to the cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, per the IMF, as well as the fallout from a developing currency devaluation in Latvia. Still, the ECB appears unfazed and seems resolved to trade away economic performance to assure inflation is kept in check, with ECB member Jurgen Stark openly suggesting that GDP growth may say low “for years to come”. This opens the door for traders to punish the Euro as they price in expectations that the region will substantially lag behind other industrial economies in recovering from the current downturn, forcing interest rates to stay lower for longer than elsewhere.
Elsewhere on the calendar, Euro Zone Economic Confidence figures are expected to tick up in June, though as we have noted previously, some recovery in sentiment is to be expected as governments’ fiscal efforts filter into the broad economy; the big question at this stage is whether growth is sustainable after stimulus cash dries up. German Retail Sales and Unemployment figures are also on tap: annualized receipts are set to drop for the fourth consecutive time in May, this time by -1.6%, while the jobless rate returns to a 16-month high at 8.3% in June after slipping to 8.2% in the previous month. The analogous reports for the greater Euro area are not expected to be any more encouraging: EZ retail sales are set to drop -2.6% in the year to May while the unemployment rate reaches a near-decade high at 9.3%.
Japanese Yen To Strengthen As Risk Appetite Wanes
Fundamental Outlook for Japanese Yen: Bullish
- Japanese Consumer Price Tumble Lower in May, Raising Risks for Deflation
- Manufacturing Confidence Rebounds From Record Low
- Japanese Trade Surplus Widens as Imports Falter
The Japanese Yen may continue to strengthen against its major counterparts over the following week as market participants curb their appetite for higher risk/reward investments, and the low-yielding currency should benefit from safe-haven flows as investors weigh the outlook for a global recovery. The World Bank lowered its growth forecast from March and projects the world economy to contract at an annual pace of 2.9% this year amid an initial forecast for a 1.7% drop in global growth, and the dour outlook held by the bank suggests rising energy costs paired with deteriorating trade conditions are likely to hamper the prospects for future growth. At the same time, the Organization for Economic Cooperation and Development predicts the global recovery to be ‘slow and fragile,’ with the economic downturn expected to have a lasting impact on the world economy as the group anticipates a permanent increase in the cost of capital. The comments foreshadow a weakening outlook for future growth as businesses face rising input costs paired with fading demands from home and abroad, and fears of a protracted recession could lead the Yen higher as investors turn risk adverse.
As a result, the USD/JPY may continue to trend lower as risk trends continue to drive price action in the foreign exchange market, and the pair may make an attempt to test the May lows in the week ahead as pair continues to retrace the advance from earlier this month. On the other hand, the economic calendar is expected reinforce an improved outlook for future growth as economists forecast industrial outputs to jump 7.0% in May, which would be the biggest rise in over half a century, while manufacturing activity is anticipated to fall at a slower pace in the second quarter. Market participants project the Tankan manufacturing index to rebound from a record-low of -51 to -43 in the second quarter, while the gauge for business expectations is anticipated to increase to -34 from -51, and the data could encourage an improved outlook for global growth as the Bank of Japan forecasts economic activity in the world’s second-largest economy to recover in the second half of the year. Meanwhile, retail spending is expected to contract for the ninth consecutive month in May, with the unemployment rate projected to increase to 5.2% during the same period, which would be the highest since 2003, and the data could foster a weakening outlook for the world economy as the downside risks for growth and inflation intensify.
British Pound At Risk With Disappointing Growth Figures Ahead
Fundamental Outlook for British Pound: Bearish
- Rightmove House prices fell by 0.4% in June, which was the first decline in five months
- The British Banker’s Association reported an increase in mortgage approvals in May to 31,162, the highest since April 2008
- OECD lowered its growth forecast for the U.K. to -4.3% from -3.7%
The British Pound finished the week on a positive note after a week of choppy price action as it found support on a pick up in risk appetite. The first decline in house prices in five months raised question’s over the scope of a U.K. recovery and led to sterling weakness to start the week. The OECD downgrading their growth outlook for the U.K. economy to -4.3% from -3.7% added to the dour outlook for the economy. A mid week head & shoulder’s pattern and a break below the 20-Day SMA appeared that the pound was head for a significant retrace before it regained its footing.
The BoE warned on Friday that the banking system is still vulnerable to any new economic or financial tensions and that banks will need to be able to survive without government help. It expressed concerns about the ability of banks to extend enough credit to support economic growth if new market strains appeared. Additionally, the central banks cautioned lenders that the level of government aide will dwindle as it becomes less effective, leaving them to fend for themselves. Therefore, if we see the pace of the recovery slow then the downside risks could increase exponentially which may sink the pound.
The UK economic calendar will give us some insight into the pace of the recovery and the depth of the hole that it finds itself in. Final 1Q GDP figures are expected to be revised lower to -4.3% from -4.1% as the recession deepened during the period. Preliminary GDP readings showed a 12.1% drop in total production which was already double the decline from the fourth quarter. Forward looking forex traders may not put too much stock in the past performance but the upcoming PMI readings will definitely garner their attention. The manufacturing gauge is expected to improve for a fifth straight month to 46.4 from 45.4, which would be the highest level since July 2008. However, the service sector is forecasted to fall to 51.5 from 51.7 which is similar to what we saw in the Euro-Zone figures. Yet, the sector accounts for mush more of the U.K. economy which can be as much as 70% and may have a greater impact on sentiment. If we see an upside surprise in the service data then we could see sterling continue its gains with a test of 1.665 the 6/3 high. Meanwhile, weakness in both sectors could be the catalyst for a pound tumble which we have been expecting. The GBP/USD has been supported by the 20-Day SMA and a clean break below that level would be a strong signal of more bearish potential with a possible test of 1.600.
Written by David Rodriguez, Ilya Spivak, John Rivera and David Song, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 06.29.09
USD - USD Slides on Poor Unemployment Claims Figures
The U.S Dollar fell against most of its major currencies pairs yesterday. It was dragged lower by an unexpected rise in weekly U.S. jobless claims that dimmed the economic picture in the U.S. The USD was also pushed lower by Federal Reserve Chairman Ben Bernanke's testimony, as he was put on the defensive due to recent controversial U.S. bank acquisitions.
By Thursday's close, the USD fell against the EUR, pushing the oft-traded currency pair to 1.4043. The Dollar experienced similar behavior against the JPY for most of the day. However, the greenback recovered slightly to finish trading higher at 95.70.
Initial claims for state unemployment insurance increased by 15,000, to a higher-than-expected seasonally adjusted 627,000, a reminder that companies will keep cutting staff, even as the U.S. economy stabilizes. However, recent data shows that some areas of the economy, such as housing and manufacturing, are seeing a smaller pace of decline, consistent with the Federal Reserve's projection that the slump is “slowing.” Companies are unlikely to hire until there are sustained gains in demand, meaning a recovery remains dependent on the effectiveness of government stimulus efforts.
Looking ahead to today, there are several news releases coming out of the U.S. These include the Personal Spending and Revised UoM Consumer Sentiment at 12.30 GMT and 13:55 GMT respectively. Better-than-expected results may help the USD recover some of yesterday's losses against the EUR and CHF. On the other hand, if the results turn out to be lower than forecast, then the USD may record a bearish session in today's trading.
EUR - EUR Soars Against the Dollar
The 16 nation currency completed yesterday's trading session higher versus most major currencies. The EUR closed higher versus the JPY yesterday, and the pair closed at around the 134.70 level. The EUR also saw bullishness against the GBP as it jumped around 60 pips and closed at 0.8547.
The major economic event that came out of the Euro-Zone yesterday was the Industrial New Orders data release. Industrial orders in the Euro-Zone were unequivocally weak, plunging more than a third, year on year in April, a record decline led by falling demand for capital and intermediate goods. A slowdown in the decline in orders in March had raised hopes that the downturn was bottoming out, but the sharp fall in April signals that a recovery may take longer to start in earnest. Analysts believe the first quarter of this year was the low point of the Euro-Zone's recession.
Looking ahead to today, the most important economic indicator scheduled to be released from the Euro-Zone is the German Prelim CPI. Analysts are forecasting this figure to increase from its previous reading. Traders will be paying close attention to today's announcement as a stronger than expected result may continue to bolster the EUR in the short-term.
JPY - Yen Experiences Mixed Result against the Major Currencies
The Yen completed yesterday's trading with mixed results versus the major currencies, on bets that the U.S. Federal Reserve and the European Central Banks' (ECB) efforts to stabilize the global economy will spur demand for higher-yielding assets. The JPY closed at 96.08 per USD from 96.20 yesterday.
Japan's consumer prices fell at a record pace in May, adding to signs that a return to deflation may hamper a rebound from the nation's worst recession. Bank of Japan Governor Masaaki Shirakawa said last week that price declines will accelerate through the middle of the fiscal year, as demand slackens and Crude Oil continues to trade lower than last year's record. Retailers are cutting prices to attract customers as falling wages and the worsening job outlook dampens spending.
Crude Oil - Crude Oil Reaches $70 a Barrel
Oil prices rose sharply to above $70 a barrel yesterday on renewed rebel attacks against Oil facilities in Nigeria, and worries that a glitch at the largest U.S. Oil refinery could tighten gasoline stockpiles during this summer's driving season. Crude Oil also got a lift from a rally on Wall Street fueled by optimism that the recession was easing, a prospect that could spell a recovery in ailing world energy demand.
Looking ahead, traders are advised to watch carefully at the leading stock markets and the major economic indicators which will be published from the U.S. and Euro-Zone in order to predict the upcoming movements in Oil prices. Nevertheless, in case the USD continues to weaken as it has lately, Oil at $75 a barrel seems like a very realistic target for next week.
Article Source - Ben Bernanke Speech to Continue Dominating Dollar Volatility Today
Key Overnight Developments
• New Zealand’s Economy Shrank More than Forecast in First Quarter
• Japanese Annual Inflation Rate Falls Most in Seven Years in May
• US Dollar Lower as Stock Exchanges Advance in Asian Trading
The Euro advanced in overnight trading, adding 0.4% against the US Dollar to test as high as 1.4047. The British Pound followed suit, testing as high as 1.6444. The greenback saw selling pressure as Asian stock exchanges gained on news that US GDP shrank less than expected in the first quarter.
Asia Session Highlights
New Zealand’s Gross Domestic Product shrank more than economists expected in the first quarter to reveal the economy was contracting at an annual pace of -2.7%, the most in over three decades. The result marks that fifth consecutive quarter of negative growth for the smaller antipodean nation. Although RBNZ Governor Alan Bollard has said that economic growth will pick up by the end of this year and chose to leave interest rates unchanged at 2.5% earlier this month for the first time since June 2008, additional easing seems likely to jolt the economy back to life especially since the soaring public deficit has seen Prime Minister John Key’s government abandon a hefty portion of the fiscal stimulus measures that had been included in the latest budget. Bollard conceded that “modest” interest rate reductions may be on tap “in the coming quarters” and reiterated that policymakers "expect to keep [rates] at or below the current level through the latter part of 2010." Still, overnight index swaps price in only a 22% probability of additional easing at the next RBNZ policy meeting in July and 50-75 basis points in tightening over the next 12 months.
In Japan, May’s Consumer Price Index report revealed that inflation fell at an annual pace of -1.1%, the largest decline since April 2002 and just a hair off the record low at -1.6%. Deflation looks set become entrenched once more in the world’s second-largest economy, keeping a lid on a meaningful rebound in economic activity as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.
Euro Session: What to Expect
Preliminary estimates of Germany’s Consumer Price Index are expected to show that the annual inflation rate fell to -0.1% in June, the first reading in negative territory in 23 years. We had noted the likelihood of such an outcome last week as Producer Prices were set to tumble to a similar low. The onset of deflation in the Euro Zone’s largest economy is all but certain to take region-wide inflation along the same trajectory, threatening to commit the currency bloc to a long-term period of subpar economic growth as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.
As we have argued previously, the present situation argues for a far more forceful monetary response than anything that has been introduced by the European Central Bank thus far, a view that is apparently shared by the OECD. Even so, recent comments from ECB officials have stressed that rates at 1% are “appropriate” for the time being and quantitative easing will be difficult to expand beyond the modest measures announced earlier this month given the internal conflict about the merit of such policies within the central bank. This opens the door for traders to punish the Euro in the weeks and months ahead as they price in expectations that the region will substantially lag behind other industrial economies in recovering from the current downturn, forcing interest rates to stay lower for longer than elsewhere.
In Switzerland, the KOF Swiss Leading Indicator is expected to rebound to -1.75 in June from a record low at -1.86 recorded in April and May. The measure is a composite of six leading metrics from the industrial, retail and wholesale sectors and is designed to project the direction of economic growth in the coming six to nine months. The minor upswing implies that the economy will continue to shrink at least through 2009, albeit at a slightly slower pace. The Swiss National Bank has forecast that the economy could contract as much as 3% this year, the most since 1975.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro Selling Possible as German Inflation Shrinks For the First Time in 23 Years (Euro Open)
USD - Dollar Optimism High Following Fed Statements
The USD has begun a rather strong rally during yesterday's early morning trading hours after the Federal Open Market Committee (FOMC) stated that it may not buy-up further Treasury securities. After climbing to as high as 1.4139 against the EUR the pair now sits near the 1.3950 price level, and seems to have leveled-off. Against the British Pound traders witnessed similar behavior to that of the EUR/USD with a steady climb towards 1.6600 followed by a steady decline back towards 1.6400.
This behavior was likely brought on by a low level of confidence going into the FOMC meeting yesterday which caused a sell-off for the USD. However, with an unexpected show of confidence in the future recovery of the US economy, and statements describing a slowing of the economic contraction, traders viewed the greenback as a solid investment for this turbulent period. As such, the value of the Dollar has been on the rise against almost all the major currencies.
On the other hand, today's economic calendar is filled with events capable of shifting the momentum into the opposite direction. If the unemployment claims report shows that jobs are still being lost in substantial numbers, and if the Final GDP figures come out worse than expected, this market optimism could suffer a devastating setback. Federal Reserve Board Chairman Ben Bernanke is also due to testify on the acquisition of Merrill Lynch by Bank of America to Congress at 14:00 GMT which will no doubt cause a stir in the forex market directly after his opening statements.
EUR - Euro-Zone Weakens on Poor Data, EUR sees Mixed Results
The EUR began today's trading session with mixed results against its major currency rivals. Losing ground to the greenback as the US Federal Open Market Committee (FOMC) announced it would not purchase additional Treasury securities, which aroused a surge in the value of the Dollar, the EUR/USD fell this morning towards 1.3950. Contrary to this, however, the EUR witnessed a sharp spike against the Swiss Franc as the Swiss National Bank (SNB) decided to de-value the CHF out of fear of deflation. The pair now trades above 1.5300, up from 1.5000 yesterday.
This week has proven to be a painful trading week for the European currencies as financial data has shown a deepening contraction of the economies in the region. European Central Bank (ECB) President Jean-Claude Trichet warned about budget deficits on Monday while the World Bank declared that the global economic contraction may be worse than conventional forecasts. Tuesday was fraught with a series of poor manufacturing and production reports from Germany and France, and yesterday's Current Account report only validated Trichet's earlier estimation that budget deficits were becoming a more looming problem.
From the above information comes a panel of valuations for the EUR which may appear confusing. Against other European currencies, the EUR was largely flat, except for the CHF which was intentionally de-valued. And against the JPY, the EUR has climbed, as the island currency loses strength across the board. Today's trading will no doubt be dominated by the US Dollar considering its recent surge may come to an end if today's data proves disappointing. If this is indeed the case, the EUR may find itself on the rebound. Whatever the outcome, today will be a great day for short-term traders as the volatility is certain to be intense.
JPY - Yen Pares Gains as Traders Turn Westward from Europe
After climbing towards important psychological barriers against a number of currencies, the JPY apparently failed to breach on all fronts and is now positioned to lose strength against all of its currency counterparts. Hitting the 95.00 price level against the USD, the pair has now entered an uptrend as the Yen loses out to the Dollar's recent surge. Against the EUR and GBP traders can see very similar behavior to that of the USD/JPY with a strong uptrend for the JPY followed now by a small, corrective down-tick.
With little news affecting the island currency today, there is a chance that this turn of events was brought on by the relative safety of other assets. With confidence declining across Europe, but gaining strength in the US, measurements of risk aversion and risk appetite appear muted and confused. The aversion to risk throughout the Euro-Zone may have pushed investors into safe-havens, but the strength of the greenback pulled most investors westward to the States instead of Japan. With a number of important manufacturing and inflationary figures being released at the end of Thursday's session, we may yet see a growth in volatility for the JPY.
Crude Oil - USD's Surge puts Rising Price of Oil on Hold
The price of Crude Oil was expecting further support yesterday as the USD was being sold off by most investors. The build-up towards the FOMC statement yesterday had many investors anticipating an increase to the purchase of US Treasury securities. When this was not forthcoming, a surge in confidence for the Dollar put Crude Oil's rebound on hold. The price leveled off around $68.50 a barrel and appears to be standing firm.
The Organization of Petroleum Exporting Countries (OPEC) and the European Union (EU) have recently called for further regulation of the energy market to prevent another bubble from forming in the price of Crude Oil. While stating that recent oil prices are not yet a threat to global economic recovery, the fear of a speculation bubble still looms large in the minds of producers and consumers alike.
With crude inventories in the US shrinking more than anticipated, there is a chance that prices will continue to rise as demand climbs from market optimism and economic growth, and OPEC has even declared that a price range near $80 a barrel is preferable. These factors point to the notion that Crude Oil's price may stumble across more support in the near future and continue to rise.
Article Source - U.S. Unemployment Claims on Tap
Key Overnight Developments
• NZ Current Account Deficit Shrinks as Imports Tumble 21.9%
• US Dollar Trades Lower as Stocks Rise on US Durable Goods Data
The Euro crept higher in the overnight session, adding 0.4% against the US Dollar. The British Pound followed suit, testing as high as 1.6468 against the greenback. The Dollar backed off after gaining substantially in US hours as stocks surged in Asian trading, boosted by an unexpected improvement in US Durable Orders that weighed on demand for safe-haven assets.
Asia Session Highlights
New Zealand’s Current Account deficit shrank in the first quarter, revealing a shortfall of –NZ$1.25 billion versus –NZ$4.06 recorded in the three months to December 2008. However, the improvement in the headline figure is hardly encouraging, owing to a -21.9% decline in imports rather than any rebound in foreign demand. The metric paints a picture of weak domestic demand and seems all the more ominous in the context of a 1.1% currency appreciation during the reporting period which would reasonably be expected to boost New Zealanders’ purchasing power of foreign goods. Private consumption accounts for 62.3% of overall economic growth and continued weakness in domestic spending makes it unlikely that the smaller antipodean nation can mount a meaningful recovery from the current downturn in the near term. Indeed, tomorrow’s GDP report is expected to show that the economy contracted for the fifth consecutive quarter, shrinking -0.7% in the three months to March.
Euro Session: What to Expect
An uneventful economic calendar is likely to yield to risk trends as the primary driver of forex price action in European trading hours. Where these trends will lead the major currencies in the very near term looks uncertain, however, as traders resolve the balance between the impact of an unexpected improvement in US Durable Orders and the dovish FOMC policy announcement. The Asian session seemed to favor the former catalyst, pushing stock prices higher and modestly weighing on the US Dollar. The same looks likely going forward with US equity index futures implying the Dow Jones and S&P 500 will open over 1% higher on Thursday, hinting at a healthy appetite for risk-taking across financial markets. That said, a downward revision in tomorrow’s final update to US first-quarter GDP figures may amplify the Fed’s cautious tone, supporting demand for safe-haven assets and boosting the greenback.
Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Threatened as Asian Stocks, US Index Futures See Rising Risk Appetite (Euro Open)
USD - USD Under Pressure Ahead of Interest Rate Announcement
The U.S. Dollar went bearish against most major currencies on Tuesday, as uncertainty ahead of today's Federal Funds Rate announcement put the USD under strong selling pressure. The greenback fell the most in 2 weeks against the EUR as European Central Bank (ECB) council member Axel Weber said policy makers have already used up their room to cut borrowing costs, indicating the Euro-Zone's Benchmark Rate will stay higher than the equivalent U.S. rate
The Dollar did rise against the Yen, to finish trading at the 95.54 level. This was despite U.S. data showing sales of previously owned homes in the United States rose less than expected in May. However, the Yen's losses may have been extended in late trading due to mixed data from Japan's economy.
Today, the Federal Open Market Committee (FOMC) is widely expected to leave its fed funds Rate target in a range of 0% to 0.25%. Investors will be watching to see whether the Federal Reserve unveils any changes to its Treasury and mortgage asset-purchase program to further boost liquidity.
The U.S Dollar has come under pressure in recent weeks as more upbeat U.S. economic data fueled hopes that a global economic recovery was on track. The USD may extend its declines after this week's Federal policy meeting, according to analysts.
EUR - EUR Rises to a 2 Week High vs. the USD
The EUR rose 1.6% against the Dollar to $1.4075 in late afternoon trading yesterday, after hitting a session peak of $1.4109. It was the biggest one-day percentage gain since May 8. The EUR also gained 0.9% against the Japanese Yen to finish trading at the 134.61 level.
Investors were also buying the EUR ahead of the European Central Bank's (ECB) first-ever one-year refinancing operation on Wednesday, aimed at encouraging banks to lend again. The European currency also rose against the British Pound to 0.8557 yesterday by the most in almost 3 weeks after Bank of England (BoE) Chief Economist Spencer Dale said a weaker currency was a key channel to spur economic growth.
Markets will be watching for the Federal Reserve's outcome today, as low Interest Rates would hurt the Dollar, and any move to expand the Fed's $300 billion Treasury buying program to keep long rates low could raise inflation concerns, undermining foreign appetite for U.S. assets.
JPY - Yen Falls against the USD on Economic Concerns
The Japanese currency fell sharply on Tuesday, falling against most of its major currency pairs, tumbling from creeping doubts about the sustainability of any economic recovery. The JPY fell 0.3% vs. the greenback to 95.54 Yen. The JPY also slipped against the EUR by over 250 pips to 134.61 Yen, as investors continued to cut bets on low-yielding assets, and sold-off the Yen against other major currencies.
Traders were also cautious ahead of a U.S. Federal Reserve policy decision on Wednesday, and this week's record $104 billion sale of U.S. debt. This has meant that renewed concerns about the global economy have actually fed through more into a weaker Yen than a weaker Dollar, analysts said.
Crude Oil - Crude Oil Inventories Data to Drive Oil Trading Today
Crude Oil prices rose nearly 4% on Tuesday to $68.59, as the U.S Dollar weakened and disruptions from OPEC member Nigeria stoked supply concerns. Crude prices also rose on expectations that Crude Oil Inventories in the U.S., the world's biggest consumer of Oil have fallen. Oil rose yesterday as the U.S. currency slipped the most in 2 weeks against the EUR on speculation that the Federal Reserve will temper expectations of an Interest Rate increase this year.
Inventories expectations and the weak Dollar are helping Crude Oil, analysts said. Commodities' trading was choppy with all the news ahead, such as inventories and the Federal Reserve's decision later today. Analysts expect the data to show U.S. commercial Crude stocks dropped 1.2 million barrels, according to a survey of analysts. Traders are also awaiting the Federal Reserve's statement at the end of its two-day meeting later today.
Article Source - US Federal Funds Rate to Drive the Market Today
Key Overnight Developments
• Japan’s Trade Surplus Swells as Drop in Imports Tops Expectations
• US Dollar Range-Bound as Forex Market Eyes FOMC Announcement
The Euro kept to a narrow 40-pip range in the overnight session, oscillating below 1.41. The British Pound followed suit, trading in a 50-pip band above 1.6420.
Asia Session Highlights
Japan’s Merchandise Trade Balance grew more than economists expected, printing at 299.8 billion yen in May from 69 billion in the previous month. Forecasters were calling for a 210 billion yen result ahead of the release. Notably, the uptick in the headline figure came courtesy of a steep decline in inbound shipments that outpaced the drop in overseas sales, painting a grim picture of the spending climate in the world’s second largest economy. Imports fell -42.4% in the year to May, printing within a hair of the 22-year record drop of -43% registered in February. Looking ahead, the headline figure may continue to grow as companies acclimate to lower global demand. Minutes from the last Bank of Japan policy meeting saw policymakers note that exports will “level out…mainly due to progress in adjustments in local inventories” while consumption (including that of imported goods) remains weak as the “employment and income situation becomes increasingly severe.”
Euro Session: What to Expect
The Euro Zone Current Account deficit may narrow for the sixth consecutive month in April, but looking beyond the headline figure reveals a picture that is hardly encouraging for the currency bloc’s economic prospects. The trade portion of the metric released last week saw the deficit narrow more than economists expected and the capital side of the equation also seems supportive: Euro Zone countries’ stock exchanges rose 15.4% on average in April while benchmark 10-year bonds from Germany, France and Italy (the bloc’s top three economies) added an average of 2.3%.
That said, the improvement in the Euro area’s trade position came as the fall in imports (-2.7%) outpaced that of exports (-1.3%), an ominous sign that suggests home-grown spending is relatively weaker than overseas demand. Private consumption is the largest component of overall economic growth so the latest trade data may be hinting that the Euro Zone will lag behind its main trading partners in seeing a meaningful recovery from the current downturn.
This is not to say the Current Account deficit will necessarily continue to contract: support from capital flows may prove fleeting if risky assets reverse course as traders see stocks as overvalued relative to future earnings given the increasingly negative global growth outlook, sinking top European exchanges. May’s edition of the OECD Economic Activity Outlook may prove to be a near-term catalyst in this regard if the report mirrors the tone of last week’s World Bank forecast which downgraded their Euro Zone forecast to call for a -4.5% drop in GDP this year, an outlook that is nearly twice as worse as the Bank’s previous call for a -2.7% contraction reported in March. On balance, a survey of economists conducted by Bloomberg forecasts that the current account deficit will slice 1.5% off GDP in 2009, the most in 9 years, and take off another 1.2% in 2010.
Barring significant surprises in the upcoming economic data, near-term price action is likely to remain subdued in European hours as in the Asian session as traders look for tomorrow’s FOMC policy announcement to guide risk sentiment and set the directional bias for the US Dollar and major currencies.
Written by Ilya Spivak, Currency Analyst
Article Source - Forex Markets Range-Bound, Looking to FOMC to Guide Risk Sentiment (Euro Open)
USD - USD Gains on Return to Risk Aversion
The U.S. Dollar gained against its riskier counterparts Monday after the World Bank issued a poor forecast for 2009. Renewed concerns over the state of the global economic recovery combined with unfolding instability in Iran and North Korea brought back an air of pessimism pushing investors to safer currencies. The Dollar was at $1.3856 per EUR following a 0.5% gain since Friday and at 95.99 Yen down from 96.23.
The World Bank predicted Monday that the global economy will shrink 2.9% in 2009, much deeper than the previous estimate of 1.7%. Doubts were also raised that developing countries will be able to spur global economic recovery as their GDP is expected to grow only 1.2% in 2009. The prospect for world economic recovery is expected to be slow and shallow. The report led to a decline in equity markets and commodities which further helped strengthen the Dollar.
The biggest risk to the Dollar this week is the highly anticipated Federal Open Market Committee (FOMC) meeting that is set to begin today and concludes Wednesday with a policy statement. Existing Home Sales are set to be released at 2:00 GMT; however, most of the focus will still be on the outcome of the FOMC meeting as investors await announcements regarding the Fed's Treasury buying program and direction of interest rates.
EUR - EUR Loses against Most Currency Pairs
The EUR lost against its major currency pairs Monday as investors returned to risk aversion after a disappointing report from the World Bank. The EUR traded at $1.3856 Monday down from $1.3948 and at 133.05 Yen down from 134.22 Friday.
Additional pressure to the EUR came after European Central Bank (ECB) President Jean-Claude Trichet stated that he has no intention of offering stimuli to the Euro-Zone economy. A slightly stronger than expected rise in the German Ifo Business Climate had a very short and mild effect on the EUR considering Germany's budget deficit shortfalls made this boost in optimism appear muted.
Despite some interesting economic data set to be released today, including the German Flash Manufacturing PMI and the German Flash Services PMI, both to be released at 7:30 GMT, the markets are awaiting the FOMC meeting statement and ECB's one-year refinancing operation, both due on Wednesday.
JPY - Political Turmoil Benefits JPY
The Japanese Yen gained against most major currencies Monday as risk aversion returned amid political unrest in Iran and a gloomy report from the World Bank regarding expected global recovery. The report stated that the recession will be deeper than previously forecasted, pushing investors to safer currencies, such as the Dollar and Yen.
The Yen traded at 132.87 per EUR following a 0.9% increase yesterday and was at 95.86 per Dollar, after rising 0.4%. Economic data released earlier showed an improvement in the business sentiment index as well as an improvement in the services sector, providing a brighter outlook for Japan's economic state. As the world turmoil continues, it is likely the Yen will extend its gains during today's session as well.
Crude Oil - Crude Oil Drops below $67 a Barrel
The price of Crude Oil dropped more than $2 a barrel yesterday after the World Bank estimated the world economy will contract 2.9% in 2009. A rebounding Dollar also put pressure on Oil as investors moved away from riskier assets and into safe-haven currencies.
Declining expectations of a recovery in U.S summer gasoline demand along with reports of sharp increases in inventories snapped Crude's recent rally. Gasoline demand usually peaks during the summer in the U.S, but in light of the continuing recession and growing unemployment there are less commuters and fewer vacation plans. Furthermore, since refiners are operating at roughly 86% of capacity, even with a sharp increase in demand, gasoline supplies are unlikely to tighten further. There is expectation that the U.S. gasoline inventories will keep rising.
Although some correction is expected, investors are awaiting the release of the U.S Crude Oil Inventories on Wednesday at 14:30 GMT and the FOMC statement to be released 18:15 GMT.
Article Source - World Bank Forecast Returns Traders to Safe-Havens
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!