Australia Holds Rates at 3% But Says Deflation May Prompt Future Easing (Euro Open)

The Reserve Bank of Australia kept interest rates unchanged at 3.00% but said the prospect of medium-term deflation could require further rate cuts. Swiss Gross Domestic Product data headlines a busy economic calendar on tap for European trading hours.

Key Overnight Developments

• Australian Current Account Gap Smaller Than Expected on Imports Drop
• RBA Keeps Rates Unchanged at 3%, Says Deflation May Prompt Future Cuts

Critical Levels

The Euro traded sideways in the overnight session, oscillating around the 1.4160 level. The British Pound followed suit, with prices confined to a narrow band 60-pip band above 1.64.

Asia Session Highlights

Australia’s Current Account Balance deficit narrowed more than economists expected in the first quarter, showing a shortfall of just –A$4.6 billion versus expectations of a –A$5.4 billion result. The improvement came as the drop in Australians’ demand for foreign-made goods outpaced sagging outbound shipments. Imports fell -9.2% from the three months to December 2008, while exports declined -7.5% during the same period. On balance, external trade added 2.2% to overall economic growth in the three months to March. The Reserve Bank of Australia has argued that “signs of stabilization” in global growth (and particularly in China, a key trading partner) will help the larger antipode weather the current crisis better than most other industrialized economies. However, Westpac Banking Corp chief economist Bill Evans expressed skepticism about whether continued improvement in trading terms is sustainable, saying the deficit will likely expand in the second quarter as large declines in coal and iron ore prices weigh on export volume measures.

The Reserve Bank of Australia kept interest rates unchanged at 3.00%, as expected. RBA Governor Glenn Stevens sounded cautiously optimistic, saying the evidence suggested the global economy was “stabilizing” as after most countries committed to aggressive stimulus measures. Stevens suggested that signs of recovery were clearest in China and some other emerging market countries. However, the RBA chief warned that global financial markets remain fragile and credit remains tight. Most significantly, Stevens said that although “monetary policy has been eased significantly…the prospect of inflation declining over the medium term suggests that scope remains for some further [interest rate cuts]”.

Euro Session: What to Expect

Switzerland’s Gross Domestic Product report is expected to show the economy shrank -1.5% in the first quarter, the largest drop in at least three decades. The most recent comparable result dates back to the first quarter of 1991 when the economy shed -1.4%. Separately, the SVME-Purchasing Managers Index is expected to show that manufacturing shrank for the eighth consecutive month in May, albeit at a slower pace than in April. On balance, the ability of these releases to meaningfully weigh on the Swiss Franc seems limited: Switzerland’s troubles are largely a factor of overall weakness in global demand and the surge in risk appetite across financial markets since early March suggests that traders have long since priced in a dismal outcome for the first three months of 2009 and are looking ahead to a broad-based rebound later in the year.

Turning to the UK, May’s housing data is set to show a bit of an improvement from the previous month: Mortgage Approvals are set to rise by 41K, the most in over a year, while Construction PMI is likely to tick up to 39.5 from 38.1 in the previous month. Importantly, the news is only relatively encouraging: results in line with expectations would still see mortgage approvals down -25.6% from a year earlier while a reading below the 50 “boom-bust” level for the PMI metric means the construction sector is still shrinking, albeit at a slower pace. With that in mind, the data does not amount to a significant departure from the economic outlook already priced into the British Pound exchange rate, suggesting sterling is likely to look past the releases to continue taking cues from trends in risk appetite. Indeed, short-term studies show a trade-weighted average of the Pound’s value against top counterparts is now over 85% correlated with the MSCI World Stock Index.

Finally, the Euro Zone Unemployment Rate is set to rise to 9.1% in April, the highest in nearly 4 years. A survey of economists conducted by Bloomberg suggests unemployment will surpass 10% by the end of this year and continue higher through 2010. Mounting job losses will trim disposable incomes and weigh on consumption, the largest component of total economic output. Indeed, GDP growth in the currency bloc is expected to substantially under-perform that of the US and the UK heading into the first quarter of next year, suggesting the ECB is likely to lag behind the Fed and the BOE in raising interest rates, amounting to a bearish bias for EURUSD and EURGBP in the medium- to long-term outlook.

Written by Ilya Spivak, Currency Analyst
Article Source - Australia Holds Rates at 3% But Says Deflation May Prompt Future Easing (Euro Open)
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.

The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.


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!