Swiss Franc Threatened as CPI Falls Most in 33 Years, Points to SNB Intervention (Euro Open)

The Swiss Franc looks vulnerable in the coming session as June’s headline inflation data threatens to embolden the central bank’s efforts to depreciate the currency. The Consumer Price Index is expected to shrink at an annual pace of -1.1% in June, the fourth consecutive month of losses and the largest drop in at least 33 years.

Key Overnight Developments

• Australian Service Sector Expands For The First in 15 Months
• Euro, British Pound Retrace Higher After NY-Session Losses
• Chinese Central Bank Chief, Former VP Comments Support USD

Critical Levels

The Euro retraced moderately higher in the overnight session after sustaining heavy losses in US trading hours, adding as much as 0.5% against the US Dollar. The British Pound followed suit, testing as high as 1.6394 to the greenback.

Asia Session Highlights

Australia’s service sector grew for the first time in 15 months in June. The AiG Performance of Service Index rose past the 50 mark, the break-even point indicating expansion, rising 10.3 points from the month prior. The metric failed to garner considerable attention form the market with traders discounting the outcome as driven by the government’s aggressive spending efforts, with the big question going forward continuing to be whether the economy will retain current momentum after the flow of stimulus cash dries up.

China’s former Vice Premier Zeng Peiyan said he “sees no dramatic change in the international currency system” while the central bank head Zhou Xiaochuan said that “lower US demand poses a risk for China, [threatening] overcapacity, weaker economic growth, and unemployment.” Both comments hint at China’s confidence in and support of a stronger US Dollar, suggesting Beijing will continue to accumulate US assets (Treasury bonds in particular) to keep the domestic currency relatively cheap against the greenback and support the export sector.

Euro Session: What to Expect

The Swiss Franc looks vulnerable in the coming session as June’s headline inflation data threatens to embolden the central bank’s efforts to depreciate the currency. The Consumer Price Index is expected to shrink at an annual pace of -1.1% in June, marking the fourth consecutive month in negative territory and the largest decline in at least 33 years. The statement issued by the Swiss National Bank following their quarterly policy meeting in June said that the risk of deflation “remains a concern” and reiterated their aim to continue driving long-term borrowing costs lower by buying local currency-denominated bonds and committed to “take firm action to prevent an appreciation of the Swiss franc against the euro.” At this point, the SNB expects inflation to shrink -0.5% on average over 2009 and rebound to add 0.4% next year. The International Monetary Fund (IMF) seems to disagree, however, calling for CPI to fall -0.6% this year and -0.3% in 2010. A downside surprise in June’s report could open the door for traders to punish the Franc as they price in a likelihood that the SNB’s outlook will prove too rosy, requiring the bank to step into the forex market at an accelerated pace to drive down the CHF exchange rate. The possibility of such an outcome seems reasonable considering the leading Producer and Import Prices reading fell by a greater-than-expected -5.0% in May, topping forecasts for a -4.7% decline.

Turning to the Euro Zone, Retail Sales are expected to fall -0.1% in May to bring the annual pace of decline to -2.7% and reversing two consecutive months of slowing losses. On balance, receipts continue to move firmly in line with the downward trajectory that has held since sales topped out in December 2006. Lackluster consumption has trimmed an average -0.9% off overall economic growth in the six months ending in March and losses are likely to accelerate as European companies continue to shed jobs: the jobless rate hit the highest level in a decade in May and is expected to top 10% by the end of this year according to a survey of economists conducted by Bloomberg.

In the UK, June’s services Purchasing Manager Index is set to show that the sector expanded for a second consecutive month after the metric swung above the 50 “boom-bust” level in May for the first time since April 2008. The most recent economic forecast from NIESR, a think tank, suggested “the trough of the depression, with output rising in April and May” after GDP shrank -2.4% in the first quarter, the most since 1958. To that effect, first-quarter Housing Equity Withdrawal figures may a muted impact as the metric falls to a record-low -9.0 billion pounds as a terrible three months to March have likely already been priced into the exchange rate. On balance, consensus economic growth forecasts suggest that the UK will trail behind the US but outpace the Euro Zone through the end of 2010, suggesting the Bank of England will follow the Fed but lead the ECB in lifting interest rates as the recovery firms. All told, this points to a bearish bias for both GBPUSD and EURGBP in the months ahead.

Written by Ilya Spivak, Currency Analyst
Article Source - Swiss Franc Threatened as CPI Falls Most in 33 Years, Points to SNB Intervention (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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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.

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