7.02.2009

Euro Volatility Likely as European Central Bank Announces Interest Rates (Euro Open)

Euro volatility looks likely in the coming session as the European Central Bank issues a highly contested interest rate decision, with expectations calling for policymakers to keep borrowing costs at 1% despite mounting pressure to provide greater monetary stimulus and a growing deflationary threat.

Key Overnight Developments

• Australian Trade Deficit Widens Five Times More Than Expected
• Euro Declines Against US Dollar Ahead of ECB Rate Decision

Critical Levels



The Euro drifted lower in Asian trading, slipping as much as -0.4% against the US Dollar ahead of the ECB interest rate decision. The British Pound is little changed ahead of the opening bell in Europe having oscillated in a choppy range below 1.65 for much of the overnight session.

Asia Session Highlights



Australia’s Trade Balance deficit widened much more than expected, showing a –A$556 million shortfall in May. Economists were forecasting a –A$125 million result ahead of the release. Exports fell for the third consecutive month, shrinking -5.2%. Annual revenues from overseas sales of coal and iron ore, Australia’s top export goods, registered the smallest increases in at least 7 months, rising 2.4% and 7.2% respectively. Looking at Australia’s top trading partners, shipments to Japan and the UK led losses, falling -13.2% and 11.2% respectively; exports to the US, South Korea, and India also saw notable declines. That said, sales to China, Australia’s largest trading partner, grew 9.4% from April and may continue higher considering recent data showing the Asian giant’s manufacturing sector grew for the fourth straight month in June. Notably, China’s state media reported that the country plants to stop stock-piling commodities; if true, this could weigh on Australian exports in the months ahead. On balance, a survey of economists conducted by Bloomberg expects a negative net impact from foreign trade on economic growth for the foreseeable future, with net exports trimming an average of -5.5% off GDP through the end of next year.

Euro Session: What to Expect



Euro volatility looks likely in the coming session 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 59.9% chance of a 25 basis rate cut, a sharp reversal considering they were reflecting a 62.7% chance of a rate hike just a week 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 revealed that prices shrank at an annual pace of -0.1% in June, the first negative reading on record since the creation of the single currency in 1991. The latest Producer Price Index data 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”. Barring any dovish surprises, 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.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Volatility Likely as European Central Bank Announces Interest Rates (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.
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!