Forex Trading Weekly Forecast - 07.20.09

US Dollar Restricted to Narrow Range – What could Force a Breakout?

Fundamental Outlook for US Dollar: Neutral

- US Dollar falls as Goldman Sachs results boost S&P 500
- US Jobless Claims boost hopes that economy may recover
- US Dollar may react to Federal Reserve’s Ben Bernanke Testimony

Impressive rallies in the S&P 500 left the US Dollar lower against all major currencies except the Japanese Yen, but a relative sense of unease across financial markets highlights risks of a major USD bounce. US and European equity indices finished the week anywhere from 6-8.5 percent above their previous close—good for a 2000-3000% annualized rate of return. Early-week moves came on impressive earnings results from Wall Street titan Goldman Sachs and relatively benign economic data. It is easy to claim, however, that recent developments are unlikely to sustain such an impressive rate of returns. A relatively empty week of economic event risk ostensibly limits volatility expectation in the days ahead, but traders should keep a close watch on several key earnings reports and effects on the S&P 500 and US Dollar.

The US currency remains in a wide and choppy range against the Euro and other key currencies, and it may take a fairly significant shift in financial market risk sentiment to break the dollar from its trading channel. Had we known a week ago that the S&P 500 would break to fresh 30-day highs, we may have claimed that the EUR/USD would similarly break to fresh medium-term peaks. Yet forex markets clearly had other things in mind—constraining the heavily-traded currency pair to its two-month wedge formation. Consolidation patterns typically lead to noteworthy breakouts, but a continued downtrend in volatility expectations gives little reason to believe such a break will come in the week ahead. Indeed, the DailyFX 1-week currency volatility currently stands near 12-month lows.

The obvious question remains: What could break the US Dollar from its medium-term trading range? In short, there is no real way to know. Our natural suspicion is that it will take a substantial deterioration or improvement in financial market risk appetite to break the EURUSD below 1.3700 or above 1.4300. The rolling correlation between the EURUSD and US S&P 500 continues to trade near record-highs—emphasizing the US Dollar’s sensitivity to the key risk barometer. Equity markets remain similarly linked to the trajectory in commodity markets; the S&P – Reuters CRB Commodities Index correlation likewise trades near all-time highs. Increasingly clear connections across ostensibly unrelated asset classes underline the risk that a tumble in one will lead to sympathetic moves in another.

It remains critical to monitor the trajectory of key financial market health indicators and their effects on the US Dollar. As we continue to argue, noteworthy deterioration in financial market risk sentiment will likely be the spark to force major US Dollar rallies. Absent the correction, the Euro/US Dollar currency pair may continue to trade in a progressively narrower range.

Euro to be Dollar’s Foil as Risk Appetite, Growth Take Hold

Fundamental Forecast for Euro: Bearish

- German investor sentiment unexpectedly falls for the first time in nine months
- Regional consumer prices contract for the first time since 1996
- ECB Member Bonello says bank ‘satisfied’ with current level of rates and quantitative easing

Compared to some of its liquid counterparts, the euro saw relatively staid price action this past week. Fundamental traders can thank the market’s interest in earnings and burgeoning financial troubles which kept traders’ focus on those currencies with more blatant connections to risk appetite. However, the euro is certainly not immune to these underlying drivers; and we will likely see the euro crowd react to these influences more readily going forward. What’s more, with growth numbers starting to cross the wires and significant round of economic data scheduled for release in the second half of the week; there looks to be enough fuel for EURUSD to force a breakout from its 1.4200-1.3800 range relatively soon. The question we need to ask while evaluating the fundamental landscape is whether the break will be a bullish or bearish one.

While there is a significant round of event risk to work with over the coming week; the most likely catalyst for price action for the euro (or any currency for that matter) is risk appetite. Earnings have had a distinct and severe impact on both the US dollar and Japanese yen; but the significance of such trends for the euro seems to have been overlooked. This is not likely to be the case for long. The European earnings season picks up next week; and the corporate sector’s health will be a robust and current gauge of market and economic strength – a dynamic that will be vital to speculators who have to wait until mid-August before the government reports its first readings of 2Q GDP (well after the UK and US). Another potential catalyst for risk resides in the financial markets. Here too, earnings will play their part. In its most recent Financial Stability Review, the ECB forecasted regional banks would write down another $218 billion in bad debt through 2010; but the IMF sees the figure much higher at $750 billion. If growth doesn’t take hold and buffer these losses (as policy officials are likely hoping for), this losses could trigger a delayed, European crisis. Turning from company to country risk, the health of many Eastern European countries and their banking systems are still a point of contention. As the larger Euro Zone members take a more frugal policy stance, neighbor bailouts could suffer during a time of particular vulnerability.

From the EURUSD response to the swell in risk appetite over the past week, the influence of each fundamental driver can have a different intensity for different currencies. Aside from risk, the other essential theme in Forex going forward is growth. As market commentators and participants latch on to the very early signs of an economic recovery (which is more a deceleration in the pace of recession at this point), the sensitivity to forecasting which nation is pacing the revival will increase. This is especially true for the Euro Zone which has collective spurned international calls to inject further stimulus funds into its economy to prevent further troubles down the road. This is a gamble which could amplify a double dip recession or pay off by accelerating the return to growth while allowing the government to work down its deficits more quickly. The IMF has projected a comparatively weak rebound for the regional economy with a 4.8 percent contraction this year and 0.3 percent expansion in 2010. This past week, China reported the first increase in the pace of economic activity since the beginning of 2007. Next Friday, the UK will mark the first developed country to report – and the trade ties and proximity of these nations will not go unnoticed by euro traders. However, there will be plenty of fodder for those that want direct fundamental contact. Euro Zone industrial production and current account numbers gauge growth through factory activity and trade. Though, it will be the advanced PMI figures for July that really offers speculators something to work with.

Japanese Yen Volatility Likely on Earnings News, Intervention Threat

Fundamental Forecast for Japanese Yen: Neutral

- Japanese Service Demand Unexpectedly Drops on Job Losses
- Bank of Japan Cuts Economic Growth Forecast, Extends Credit Easing
- Consumer Confidence Rose for the Sixth Consecutive Month in June

The Japanese Yen is likely to see volatility in the coming week as the flow of corporate earnings releases and the demise of CIT promise sharp swings in risk appetite while Japan’s new currency chief openly threatens forex market intervention if the Yen gets too strong.

Although the initial round of second-quarter results offered a strong start to the reporting season, the fundamentals behind the euphoria continue to look shaky. Indeed, shares are trading at the highest level relative to earnings since 2004, a year when the world economy grew 4.1% in real terms. The OECD, IMF, World Bank, and all major central banks are in agreement that the world economy will shrink this year, suggesting the markets have been more than a little overzealous in their optimism. Further, the earnings reports that have already passed have set the bar very high for upcoming announcements, making it all the more possible that a disappointing outcome will topple global exchanges.

The imminent collapse of CIT, a top-10 lender to small- and medium-sized businesses including a number of key retailers, could also weigh heavily on risk-taking. Beyond corporate loans, CIT is the third-largest provider of transportation finance (such as leasing rail cars for moving products) and the number one independent provider of vendor financing (such as the leasing of technology and office equipment). This means that the firm’s demise threatens to disrupt day-to-day operations of a large part of US businesses above and beyond the need for credit. CIT failed to convince the US government to back its debt, but only the onset of bankruptcy will show whether the market agrees with regulators that the firm is not “too big to fail”.

Stand-by yield-seeking trades like GBPJPY and all of the Japanese unit’s pairings with commodity-linked currencies are on average over 90% correlated with the MSCI World Stock Index, meaning that any return to risk aversion is likely prompt sharp carry-trade liquidation and boost the Yen. This could open the door for Japan to intervene into the currency market, judging by recent comments from the country’s newly-minted vice finance minister for international affairs Rintaro Tamaki: “We’ll make judgments based on whether excessive movements in the currency market will adversely affect the economy… if you were to ask me if we’d never intervene, the answer would be no.” Clearly, the current situation is tremendously unstable, creating a profoundly fertile environment for Yen volatility.

The economic calendar is noticeably tame given the aforementioned catalysts. Minutes from the last meeting of the Bank of Japan are unlikely to produce much more insight beyond the initial policy announcement while the expected expansion in June’s Merchandise Trade Balance surplus seems predictable as an abysmal job market continues to weigh on imports.

British Pound Under Pressure Ahead of Advanced 2Q GDP Numbers

Fundamental Outlook for British Pound: Neutral

- UK CPI fell to an annual rate of 1.8% in June, putting inflation below the BOE’s 2% target
- UK jobless claims rose for the 16th straight month in June, ILO unemployment rate hits 12-year high
- The IMF warned that the British pound faced risks unless PM Brown curbed the UK’s budget deficit

The British pound may have ended the past week up against the US dollar and Japanese yen, but the UK’s national currency ultimately fell against the rest of the majors amidst rising jobless claims and warnings from the IMF that the UK’s budget deficit threatened to hurt the pound. Overall, sentiment on the nation remains extremely bleak. So bleak, in fact, that Prime Minister Gordon Brown won the support of the UK’s two main opposition parties to force banks to defer half of the bonuses given to their top executives for five years as the backlash against the financial sector continues.

Economic data due out this coming week threatens to hurt the British pound as well, but the big question is if news can lead GBPUSD to break out of its large range of 1.60-1.66. The release of the minutes from the Bank of England's July 9 meeting at 4:30 ET on Wednesday may not be as market-moving as they've been in the past since comments are likely to be fairly neutral. Nevertheless, economic conditions in the UK remain bleak, as the final reading of Q1 GDP for the UK was unexpectedly revised down to an annual rate of -4.9 percent, the lowest since recordkeeping began in 1956, from -4.1 percent. This leaves GDP at the bottom of the BOE’s previous range of forecasts, which has left speculation that the central bank will expand their quantitative easing (QE) program to fester. As a result, if there are signs within the minutes that this is occurring, the British pound could take a hit.

On Friday, the 04:30 ET advanced reading of Q2 GDP for the UK is forecasted to contract for the fourth straight quarter at a rate of -0.3 percent, which could drag the year-over-year rate down to a fresh record low of -5.2 percent from -4.9 percent. The UK has been hit particularly hard by the credit crunch since the country was considered to be one of the biggest financial centers in the world. This has translated into a full-on collapse of the housing market, climbing job losses, and weak consumption. Furthermore, with growth slowing around the world, demand for British exports has declined as well, putting a large burden on manufacturers. Overall, a greater-than-expected decline could lead the British pound lower as the data would raise the odds that the Bank of England will expand their quantitative easing efforts. On the other hand, if GDP is a bit better than forecasts, the currency could surge.

Written by David Rodriguez, John Kicklighter, Terri Belkas, Ilya Spivak, John Rivera and David Song, Currency Analaysts
Article Source - Forex Trading Weekly Forecast - 07.20.09
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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

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!