US Dollar May Gain as Currency Markets Follow Risk Trends in European Hours (Euro Open)

The US Dollar may rise as stocks retreat and US equity index futures point to a lower open on Wall St with currency markets focused on trends in risk sentiment to drive price action, looking past a virtually empty economic calendar.

Key Overnight Developments

• NZ Service Sector Expands For Second Month on Inventories; Sales Decline
• UK House Prices Fell Least in a Year in September, Says Rightmove
• Euro, British Pound Sold Against US Dollar as Most Stocks Fall in Asia

Critical Levels

The Euro trended lower to start the trading week, testing as low as 1.4678 to the US Dollar in overnight trading. The British Pound followed suit, dropping as much as -0.4% against the greenback. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

New Zealand’s Performance of Services Index rose to 51.3 in August, showing the sector expanded for the second consecutive month. The details of the report are not nearly as encouraging as the headline figure would suggest, however. Inventory growth led the metric higher, adding 5.9% from the previous month, while Sales fell -1.2% to register the first decline in four months. On balance, this looks to be a reflection of the same dynamic we have seen throughout the apparent economic recovery of recent months: companies are restocking, all the while cutting costs and shedding jobs, which boosts relative output readings but says very little about the sustainability of the rebound once government stimulus is withdrawn and private demand (increasingly ravaged by unemployment as it is) has to step in and pick up the slack. Separately, Credit Card Spending fell -1.9% in the year to August, in line with the average noted over the past four months.

UK House Prices fell -1.5% in the year to September, registering the smallest decline in over a year according to Righmove Plc, an online listing of for-sale properties. Righmove commercial director Miles Shipside said, “Confidence is up, stock is down and the number of people searching is high.” The rebound says little about the health of the economy, however, with low supply being the dominant force behind higher home values according to a report from the Royal Institution of Chartered Surveyors (RICS) released last week. Consumer confidence has tracked the rebound in the FTSE 100 benchmark UK equity index with a correlation of over 90% since March, making this part of the equation highly vulnerable to any reversal of the recent rally in risky assets. For our part, we have long argued that the markets have done too much, too fast over the past six months, with global equities trading at levels unseen since 2003 relative to earnings. The world economy grew nearly 3% in real terms that year, whereas virtually every credible forecast calls for the first post-WWII contraction in real growth in 2009, pointing to lackluster revenues and overextended asset prices. Further, trading volumes have steadily declined for the bulk of the equity rally (the past 5 out of 6 months). While some of this may be chalked up to a seasonal slowdown that is typical for the summer, it may also be hinting at waning conviction behind the up move and a forthcoming reversal as traders return from holiday and volumes pick up into the Fall.

Euro Session: What to Expect

With next to nothing on the economic calendar, risk sentiment is likely to be the primary catalyst driving currency markets in European hours. Risk appetite retreated at the start of the trading week: most Asian markets sold off, led by finance and mining companies, and US equity index futures suggested Wall St will open as much as -0.5% lower on Monday. This points to continued gains for the safety-correlated US Dollar after the greenback rose against the spectrum of major currencies in overnight trading.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar May Gain as Currency Markets Follow Risk Trends in European Hours (Euro Open)
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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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