7.31.2009

Euro Zone Consumer Prices to Shrink for Second Month, Boosting Deflation Risk (Euro Open)

The Euro may see selling pressure emerge in the coming session as the Euro Zone Consumer Price Index shows that inflation fell for the second consecutive month in July, stoking risks of deflation that could commit the currency bloc to a long-term period of economic stagnation.

Key Overnight Developments

• Japan’s Jobless Rate Higher Than Expected, Hits Highest in 6 Years
• Australian Lending Gains Least Since September 1993, Threatening Recovery
• Japanese Inflation Shrinks Most in Over Three Decades, More Losses Likely
• PMI Shows Japanese Manufacturing Expanded for the First in 17 Months
• US Dollar Retreats as Asian Stocks Rally After Sony Corp Earnings Outperform

Critical Levels



The Euro gained 0.4% in the overnight session while the British Pound added 0.3% against the US Dollar. Both currencies advanced as the greenback came under pressure amid a rebound in risk appetite that drove Asian stock markets higher following a better-than-expected earnings report from Sony Corp., trimming demand for safety-linked assets.

Asia Session Highlights



Japan’s Consumer Price Index printed squarely in line with expectations in June, showing that annual inflation shrank at an annual pace of -1.8%, the most in at least 33 years. The Bank of Japan has reinforced expectations of negative price growth, noting that the pace of consumer price growth is likely to turn negative, reflecting the declines in the prices of petroleum products, stabilization of food prices, and overall economic weakness. Indeed, utilities and fresh food prices led declines, slipping -5.9% and -4.7% from the previous year. The operative question going forward is whether the BOJ’s aggressive monetary easing measures will make CPI’s dip into negative territory a temporary affair, or if deflation once again becomes entrenched in the world’s second-largest economy. This would substantially delay any hopes for a recovery in the near term, keeping a lid on economic activity as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.

Turning the labor market, Japan’s Jobless Rate jumped to 5.4% in June, the highest in 6 years, while the ratio of available jobs to seeking applications fell to 0.43, a new record low. Looking ahead, a survey of economists conducted by Bloomberg suggests the jobless rate surpassed 5% in the second quarter and will approach the 6% mark by the second half of 2010 while the Bank of Japan has said that consumption to remain weak as “the employment and income situation [is] likely to become increasingly severe”. This points to continued weakness in consumer spending as layoffs weigh on disposable incomes, a clearly on display in June’s Trade Balance and Retail Sales data. Although Nomura/JMMA Manufacturing PMI rose to 50.4 in July to mark the first time since February of last year that the sector has expanded, the improvement is unlikely to boost hiring, with industrial output gains linked to restocking of inventories rather than sustainable growth in underlying demand.

In Australia, Private Sector Credit grew at the slowest pace in nearly 16 years, adding 3.4% in the year to June. Continued contraction in lending seems to bolster the central bank’s recent assertion that the influence of changes in benchmark interest rates on bank lending rates has weakened over the past two years, suggesting monetary policy is losing potency in stimulating economic activity. A breakdown in this dynamic could prove to derail an extension of positive momentum that the Australian economy has built up in recent months of the back of generous fiscal stimulus, with growth levels retreating once again when the flow of government cash dries up.

Euro Session: What to Expect



The Euro Zone Consumer Price Index is set to show inflation fell for the second consecutive month in July, shrinking at an annual pace of -0.4%. Acute economic weakness is likely to keep prices under firm downward pressure in the months ahead. Indeed, the Euro Zone Unemployment Rate is set to rise to the highest level in over a decade at 9.7% in June, weighing on incomes and discouraging consumption, the largest contributor to GDP growth. The IMF recently forecast that the Euro Zone will stand apart from other industrialized economies in seeing GDP continue to shrink in 2010. If this dynamic sees expectations of falling prices become entrenched, the currency bloc may be facing 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.

The European Central Bank has seemingly struggled to formulate an effective policy response to the deflationary threat thus far. Jean-Claude Trichet and company have focused on banks as the vehicle through which to make money cheaper and put a floor under falling prices, promising unlimited lending to the region’s financial institutions including an unprecedented 442 billion euro in 12-month bank loans. The ECB will also implement a 60 billion bond-buying scheme. To the central bank’s credit, borrowing costs have indeed moved lower: although the ECB publicly maintains target interest rates at 1%, it has allowed the average cost of overnight lending (referred to as EONIA) to drift far below that. Indeed, borrowing in Euros has been consistently cheaper than doing so in British Pounds since late June, even though the Bank of England’s stated interest rates are substantially lower at 0.5%. However, the lower cost of credit between banks has not translated into lending, and so has offered little stimulus to the overall economy. Indeed, loans to Euro Zone businesses and households grew just 1.5% in June, the lowest since records began in 1991. Banks may be choosing to hang on to cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, according to the IMF, as well as the fallout from looming defaults and/or devaluations among the EU’s newly-minted central European members. In any case, the door is open for traders to punish the Euro as the ECB’s inability to ensure that looser monetary conditions translate beyond the interbank market make deflation all but certain.

In Switzerland, the KOF Leading Indicator that aims to forecast GDP growth in the coming 6-9 months is expected to print at -1.45 in July, extending a rebound from the record low in April. As with most industrialized countries, the mountain nation is showing tentative signs of stabilization after the GDP shrank the most in 15 years in the first quarter. Although the metric is still in deeply in negative territory and virtually assures that the economy will suffer profound losses through 2009, the cautious moderation seen over recent months suggests that a bottom may be forming. Still, deflation remains a threat to sustainable long-term growth with consumer prices falling for four months straight since March.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro Zone Consumer Prices to Shrink for Second Month, Boosting Deflation Risk (Euro Open)
Euro Zone Consumer Prices to Shrink for Second Month, Boosting Deflation Risk (Euro Open)SocialTwist Tell-a-Friend

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!