Euro Vulnerable as German Retail Sales Stall, Bolstering Case for ECB Rate Cut (Euro Open)

The Euro may see selling pressure emerge in the forthcoming session as German Retail Sales come to a standstill in May, with the prospect of deepening recession boosting priced-in expectations for an ECB interest rate cut later in the week.

Key Overnight Developments

• Japan’s Tankan Survey Reveals Dour Outlook for Manufacturing
• Australian Retail Sales Top Expectations But Outlook Still Uncertain

Critical Levels

The Euro is little-changed heading in the European market open after a choppy overnight trading session that saw the single currency test as low as 1.4002. The British Pound slipped a bit lower, paring initial losses that saw the sterling sink as low as 1.6415 to trade down -0.1% ahead of the opening bell in Europe.

Asia Session Highlights

Japan’s Tankan Large Manufacturers Index rose to -48 in the second quarter from a record low at -58 recorded in the three months to March. The forward-looking Outlook index that aims to predict the third-quarter outcome rose to -30, narrowly topping economists’ forecasts of a -34 result. Despite the improvement in the headline figure, details of the report were far from encouraging: large manufacturers’ sales are expected to fall -14% in 2009 fiscal year (12 months through March 2009), the most in five years, while profits are set to shrink -39.5%. Sub-indexes measuring employment conditions and production capacity are both forecast to decline by September while the difference of expected demand less supply is set to narrow in the same period. On balance, this bolsters the Bank of Japan’s latest assessment calling for output and exports to “level out” due to inventory adjustments, meaning firms are set to continue to operate at leaner levels as demand remains lackluster. This means employment and consumption are set to remain at the lower end of the spectrum for some time notwithstanding recent improvements in household spending driven by a temporary boost from the government’s record-setting $25 trillion yen stimulus package.

Australian Retail Sales grew more than economists expected in May, adding 1% after growing 0.3% in the previous month. Forecasts issued ahead of the release were calling for a 0.5% expansion. In annual terms however, receipts grew 6%, the smallest increase since February. Department stores and clothing retailers led the metric higher, adding 5.5% and 2.9%, respectively. Sales were likely driven by the government’s aggressive spending efforts considering the same period also saw rising unemployment as well as shrinking private-sector credit. The big question going forward remains whether the economic growth will retain current momentum after the flow of stimulus cash dries up, and the outlook seems decidedly dour. A survey of economists conducted by Bloomberg calls for the jobless rate to hit 6.5% by the end of 2009, amounting to substantial headwinds for incomes and consumption, while Westpac Banking Corp has said the economy will shrink at an annualized rate of -1.5% through the second half of this year.

Euro Session: What to Expect

German Retail Sales are expected to come to a standstill in May with annualized receipts falling for the fourth consecutive month, this time by -1.5%. Deepening turmoil in the labor market has weighed on disposable incomes, trimming spending and encouraging precautionary saving. Indeed, the unemployment rate rose to 8.3% in June, the highest in 16 months, and is expected to average around 10% through the end of 2010 according to the International Monetary Fund. Consumption is the largest contributor to overall economic growth, meaning the chance of a substantive recovery in GDP growth is unlikely in the months ahead, both for the Euro Zone’s largest economy and the currency bloc as a whole. The prospect of deepening recession and an increasingly credible deflationary threat have boosted expectations that the European Central Bank will cut interest rates later this week, with overnight index swaps suggesting the market now sees a 59.9% chance of a 25 basis point reduction.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Vulnerable as German Retail Sales Stall, Bolstering Case for ECB Rate Cut (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

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