6.10.2009

Euro Threatened as German Consumer Prices Point to Deflation (Euro Open)

The Euro may see selling pressure as the final revision of Germany’s EU-harmonized consumer price index slips into negative territory for the first time since the creation of the single currency, threatening the Euro Zone’s largest economy and thereby the region as a whole with the prospect of deflation.

Key Overnight Developments

• Australian Consumer Confidence Rises Most in 22 Years, Says Westpac
• New Zealand’s Trading Terms Index Tumbles on Weak Export Demand

Critical Levels



The Euro traded sideways in Asian hours, oscillating in a 40-pip band above 1.4050 to the US Dollar. The British Pound followed suit with prices confined to a narrow 0.3% band above 1.63.

Asia Session Highlights



Australian Consumer Confidence surged 12.7% in June, the largest monthly gain in over 22 years, according to Westpac Banking Corp. More notably still, the metric’s value topped the “boom-bust” 100 level, suggesting optimists outnumber pessimists among the 1200 consumers polled for the survey for the first time since January 2008. Westpac’s chief economist Bill Evans called the result “truly remarkable” but qualified that “this surge in confidence can be seen as a delayed response to the significant stimulus over the last nine months.” Indeed, the forces behind June’s result have been revealed since traders learned that GDP unexpectedly grew in the first quarter, boosted by the government’s generous stimulus efforts. The real question going forward will be whether Australia is able to sustain positive momentum after the flow of stimulus cash dries up. Evans seems to share our cautious assessment, saying “the positive confidence reaction in June is probably premature [considering] domestic spending fell 1 percent [in the first quarter despite the positive headline figure], the sharpest fall since the December quarter of 2000.” A survey of economists conducted by Bloomberg suggests the economy will shrink for the remainder of 2009.

New Zealand’s Trading Terms Index fell -3.0% in the first quarter, the most in nearly 7 years. Import prices fell 5.4%, while those for exports declined 8.2%. The New Zealand dollar ended the three months to March moderately higher (1.08%) against a trade-weighted basket of top currencies, suggesting the fallout owes to sluggish demand for the country’s exports. Exports account for about 30% of the antipodean nation’s total output, so continued weakness here is likely to stall any prospects for a robust economic recovery in the near term. Economists expect the Reserve Bank of New Zealand will keep interest rates unchanged at 2.50% later this week but recent commentary from bank officials suggests there is ample room for a surprise reduction.

Euro Session: What to Expect



The final revision of Germany’s Consumer Price Index is set to confirm that inflation fell -0.1% in May to bring the annual pace of price growth to a standstill for the first time in at least 17 years. The adjusted version of the metric using a harmonized EU methodology is set to show an even more ominous result, confirming that the annual pace of German inflation shrank -0.1%, the first negative outcome since the creation of the Euro. The onset of deflation in the Euro Zone’s largest economy is a scary prospect for the single currency: if expectations of falling prices become entrenched, Germany may find itself treading water for longer than expected as consumers and businesses wait for the best possible bargain and perpetually hold off on spending and investment; the massive weigh of Germany as driver of economic growth for the Euro Zone as whole means that the bloc’s performance will remain subdued as well, pushing expectations for higher interest rates farther out into the future to hurt the European unit against UK and US counterparts. Indeed, overnight index swaps show traders are pricing in expectations that the Fed and the Bank of England will deliver 100 basis points in rate hikes over the next 12 months while the European Central Bank lags behind with just 61bps in the same period.

Turning to the UK, the Trade Balance is expected to narrow to 2.4 billion pounds in April from 2.5 billion in the previous month. Considering export volumes have been trending sharply lower, down 9.7% to date since peaking in July last year as the global economic downturn crushed overseas sales, it stands to reason that absent a recovery in foreign demand (an unlikely scenario considering the UK’s top trading partners are mired in deep recession) any improvement in the headline figure would come from lackluster import readings. Another drop in Industrial Production fits very neatly into this picture: output is set to shrink at an annual pace of -12.4% for the second consecutive month in April, the most in at least 33 years, largely on weak exports. This speaks directly to the current spending client, revealing that consumers remain on the defensive despite a stronger Pound that would have made foreign-made goods comparatively cheaper. As with most advanced countries, private consumption is the largest component of overall UK economic growth and continued weakness here is likely to keep a lid on any moves towards a sustainable from the current downturn. Indeed, the latest forecasts call for the economy to continue to shrink at least through the first quarter of next year.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Threatened as German Consumer Prices Point to Deflation (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.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
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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!