9.18.2009

US Dollar Rises on Safety Demand as Stocks Retreat in Asian Trading (Euro Open)

The US Dollar gained as stocks sold off in Asian trading on news that Japan’s third-largest consumer lender will suspend debt payments to its creditors, boosting demand for the safety-linked currency. German PPI, Euro Zone Current Account, and UK Public Borrowing figures are on tap ahead.

Key Overnight Developments

• Japan’s Third-Largest Consumer Lender to Suspend Debt Payments
• Hong Kong Monetary Authority Deputy Chief Says Mortgage Rates Too Low
• Euro, British Pound Decline as Stock Losses Boost the US Dollar

Critical Levels



The Euro lost as much as -0.4% against the US Dollar, testing below the 1.47 level in overnight trading. The British Pound was weaker still, slipping as much as -0.6% against the greenback.

Asia Session Highlights



Currency markets took their cues from stock exchanges in overnight trading, with the safety-linked US Dollar rising by as much as 0.3% on average against its major counterparts as stock exchanges in overnight trading. US equity index futures are trading firmly in negative territory ahead of the opening bell in Europe, suggesting risk-taking is likely to remain subdued and hinting at further gains for the greenback.

Asian exchanges declined on reports that Aiful Corp, Japan’s third-largest consumer lender, was going to suspend debt payments to its creditors citing fund-raising problems. Most worryingly, this may be a part of a larger problem: Japan’s government has capped the interest rates that consumer lenders can charge borrowers and mandated reimbursements of overcharged interest, meaning other major firms may follow Aiful’s lead.

Separately, Hong Kong Monetary Authority Deputy Chief Executive Y.K. Choi said that the city’s banks have lowered mortgage rates “to such an extent that they might not have given due regard to the reputation risk, interest rate risk and liquidity risk potentially associated with their pricing,” stoking fears that policymakers will push for higher borrowing costs and take the steam out of the rebound in asset prices.

Euro Session: What to Expect



German Producer Prices are set to show that the pace of contraction in wholesale prices slowed for the first time in 13 months in August, rising to -7.2% from a record-low -7.8% recorded in the previous month. The uptick likely reflects the recent rebound in energy prices – an index tracking energy costs from Bloomberg and UBS has rebounded over 54% since bottoming in February. While this foreshadows some moderation in deflationary pressure on consumer prices (the benchmark gauge of the price level) in the months ahead, the strength and durability of any rebound remains uncertain. Although economic growth has started to stabilize on the back of broad-based fiscal stimulus, low interest rates, and the inventory restocking cycle, unemployment rates have continued to press higher and will surely lead to anemic private demand once expansionary policy runs its course. Indeed, the International Energy Agency has forecast that global oil demand will remain firmly below its 2004-2008 average through the end of next year, working against sustainable gains in PPI growth.

The Euro Zone Current Account may post a surplus in six months in July following yesterday’s better-than-expected Trade Balance result for the same period as exports surged by 4.1%. The capital side of the equation also looks supportive: Euro area stock markets gained 9.8% while the currency advanced 0.1% on average against its major counterparts. Most interestingly, any improvement over June’s -0.3 billion euro outcome will amount to a break out of the downward trajectory that has guided the metric lower since the peak in June 2007. While it is early to be certain at the moment, this could be hinting at the formation of long-term fundamental support for a stronger Euro if it marks a sustained trend change in the regional bloc’s external position.

In the UK, the Public Sector Net Borrowing report is expected to show that the government deficit expanded by a whopping 17.6 billion pounds in August, the most since May. Public debt has swelled by a whopping 73.1 billion points so far this year and is expected to average 13% of the economy’s total output, the most among the G10 nations. To that effect, the data’s release may prove to weigh on the British Pound, stoking fears that Europe’s third-largest economy could face a cut of its sovereign credit rating.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Rises on Safety Demand as Stocks Retreat in Asian Trading (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.

Currencies

Currencies
List of most popular currencies on the Forex market

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