7.21.2009

CIT Bailout Adds to Risk Appetite, Safe-Havens in Decline

Yesterday's rally on Wall Street, which led to a devaluation of the major safe-haven currencies such as the USD, was led by a decision from CIT, a large financial firm, in favor of a $3 billion bankruptcy protection bailout. The resultant boost in confidence led stock markets into a strong rally, followed by a declaration from the Bank of Japan (BOJ) that their economy may no longer be getting worse. All of this optimism has helped to increase risk appetite and lower the appeal of safe-haven investments.



USD - Dollar Tumbles as Stock Markets Rally

The Dollar tumbled to its lowest level in over a month vs. the EUR, as Wall Street rallied on Monday. The rally was initiated by U.S. commercial finance company CIT board approving a $3 billion rescue package. The USD's subsequent devaluation and Wall Street's gains yesterday were also owed to increased risk appetite, as traders were taking into account continued optimism from the 2nd quarter, following last week's optimistic results from U.S. banks. Adding to optimism for the U.S. economy, U.S. housing data released yesterday points to stabilization of the U.S. housing sector.

The Dollar Index touched 78.799 on Monday, the lowest level since the 3rd of June. The USD tumbled against the JPY by over 70 pips to 93.92, as traders ditched the greenback for higher yielding assets. The GBP/USD jumped by 120 pips to 1.6518, as the GBP acted positively to the optimism in the banking sector. The EUR/USD closed nearly 60 pips higher at 1.4214, as the USD's safe-haven status is dissipating as signs of global economic recovery are in the making. It seems that as long as global equities rally, the USD will continue to slide vs. the major currencies.

Looking ahead to today, there are some crucial releases that are set to come out of both the U.S. and Canada. Canada is set to publish both the BOC (Bank of Canada) Rate Statement and Overnight Rate at 13:00 GMT. The results of these are set to determine the USD/CAD rate in the coming week. At 14:00 GMT, U.S. Federal Reserve Chairman Ben Bernanke will testify before the Financial Services Committee in Washington, DC. This is significant for future U.S. monetary policy. Surrounding this event, the forex market is likely to experience heavy volatility.

EUR - EUR Hits 6-Week High against USD

The EUR hit a 6-week high against the USD yesterday, as U.S. and global equities rallied. This was owed to optimistic U.S. and European data in the past week. Also, the U.S. largely led the rally, as U.S. financial firm CIT's bondholders agreed to $3 billion of emergency financing to prevent bankruptcy. The GBP also hit a 3-week high against the USD due to global banking industry expectations. The 2 things that helped the Pound gain yesterday was risk, as traders felt comfortable in diversifying their investments due to renewed optimism.

The EUR/USD cross hit as high as the 1.4250 level on Monday, before closing at 1.4210. This bullish pattern of the pair is much owed to the USD's safe-haven status declining as the global economic recovery kicks in. The GBP/USD closed at 1.6518, while the EUR/GBP cross finished lower by 30 pips at 0.8603. Much of the GBP's bullishness recently has been owed to rising energy prices and the recovery of the banking sector, as the British economy is very dependent on these 2 industries.

Today, we can expect economic news releases from both Europe and Britain. Switzerland is set to release her trade balance figures at 06:15 GMT. A high figure will be good for the CHF, as this would show a higher surplus of exported goods during the previous month. Britain is set to release public sector net borrowing figures at 08:30 GMT. A lower than forecasted 15.7 billion Pounds may help the GBP today, further adding to recent optimism in the British currency.

JPY - JPY Climbs on CIT Rescue Plan

The JPY climbed against a number of its currency pairs yesterday, as a result of the rescue plan by the shareholders of U.S. finance company CIT. This automatically helped spread the rise in equities from the U.S. to Japan. As a result, the JPY climbed against its major currency pairs. The JPY climbed against the USD by 70 pips to 93.92, as investors put their money in higher yielding assets. The Japanese currency also made gains vs. the EUR, to close 64 pips higher at 133.34.

The strength of the Japanese currency may be owed to the fact that the Japanese economy has bottomed out. Therefore, forex traders are willing to put more of their money in the Japanese currency, as the global economic situation improves. Additionally, as this occurs, investors are beginning to pour their money back into Japan. The result will therefore lead to a stronger Japanese currency for the foreseeable future. We may see the USD/JPY drop below 93.50 in today's trading.

Crude Oil - Crude Oil Hits a 2-Week High

The price of Crude Oil hit a 2-week high of $65.86 yesterday, before closing at about $65.30. Crude prices rose on Monday for a number of reasons. There was much optimism coming out of the U.S., spurred by the CIT rescue plan. In turn, the equity rally in America led traders to diversify their investments. Thus the USD declined, which helped boost the price of Crude Oil. The gains in commodities extended throughout the day.

There are some investors now that are talking of a price correction in Oil. However, if there is enough optimism to support the price of Crude, there is no reason that prices won't rise to over $66 per barrel of Crude in today's trading. This could come sooner rather than late, providing that the U.S. Dollar continues to plummet. In addition, optimism from U.S. Federal Reserve Chairman Ben Bernanke's speech may add to possible gains to Crude prices later in the day.

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What is Forex?

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


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

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

Forex Turnover

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

Currencies

Currencies
List of most popular currencies on the Forex market

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

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

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

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

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

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

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!