US Dollar Sees Selling Pressure as Chinese Data Boosts Risk Appetite (Euro Open)

The US Dollar saw selling pressure after data showed China’s manufacturing sector expanded for the third consecutive month in May, boosting stock markets on hopes that the Asian giant would help reignite global demand. Australian economic news yielded mixed results in overnight trading. May’s UK Manufacturing PMI is on tap in European hours.

Key Overnight Developments

• Australian Manufacturing Shrinks at Slower Pace, Retail Sales Rise
• Risky Assets See Boost as Chinese Manufacturing Expands for Third Month

Critical Levels

The Euro was confined to a familiar range in overnight trading, oscillating in a 60-pip band above the 1.41 level. The British Pound trended gently upward, testing as high as 1.6245 before retreating back to the 1.62 mark. The US Dollar saw heavy selling pressure overnight as China’s manufacturing sector expanded for the third consecutive month in May, boosting stock markets on hopes that the Asian giant would reignite global demand, but prices retraced ahead of the European trading open.

Asia Session Highlights

Australia’s AiG Performance of Manufacturing Index rose to 37.5 in May, the highest in seven months, rebounding from a record low at 30.1 registered in the preceding month. The reading remains below the 50 “boom-bust” level, suggesting that manufacturing continued to shrink but at a slower pace. Looking at the details of the report, the Production and New Orders components of the metric saw the most improvement while Inventories and Input Prices fell. This is cautiously encouraging news for the sector that employs over 21% of Australia’s labor force: rising orders and depleting inventories suggest firms are seeing a bit of a pick-up in demand, feeding hopes of eventual stabilization in employment and consumption.

Australian Retail Sales continued to trend broadly higher: although receipts added a bit less than expected on a month-to-month basis (0.3% vs. 0.5% forecast), annualized sales grew 6.8% in the year to April, the most since January 2008. Retail activity is likely being supported by fiscal stimulus: the government has provided every Australian with A$950 in cash handouts since March. Sales of household goods outperformed, rising 3.9%. Although consumers’ willingness to commit to bigger-ticket purchases is heartening, it remains to be seen if momentum can be maintained after the fiscal boost is exhausted. Indeed, continued weakness in discretionary spending suggests Australians view the handouts as temporary relief and reflect expectations of lower spending power in the future.

Still, the antipodean economy is hardly out of the woods. TD Securities’ inflation estimate revealed that the annual pace of price growth fell to 1.5% in May, the lowest reading on record, while Company Operating Profits fell much more than economists expected in the first quarter, shedding -7.2%. This highlights that while the pace of decline may moderate over the coming months, a meaningful return to vibrant growth and employment is farther out on the horizon. Indeed, the economy is expected to continue to shrink through the end of this year with a modest rebound seen in the first quarter of 2010.

Euro Session: What to Expect

The UK Purchasing Manager Index is set to show that manufacturing contracted at a slower pace in May, rising to 44.0 from 42.9 in the previous month. On balance, only a print above the 50 “boom-bust” level is likely to have any substantial impact on the British Pound with sector weakness having been priced in for some time now. The data is most likely going to take a back seat to risk trends: US equity index futures are trading higher ahead of the opening bell in Europe suggesting risky assets will continue to advance, threatening safety-linked currencies (most notably the US Dollar) with continued selling pressure.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Sees Selling Pressure as Chinese Data Boosts Risk Appetite (Euro Open)
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What is Forex?

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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

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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.

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