Euro / US Dollar Has Been Driven by Trends in Risk Sentiment
Recent months have seen EURUSD exhibit a very strong correlation with trends in risk appetite. Indeed, the pair’s correlation with the MSCI World Stock Index (a composite metric tracking global stock performance) reached as high as 95.2% in mid-January and now stands at a formidable 90.2%. As global demand weakened, expectations of dour earnings weighed on stock markets and pushed traders to pull capital from equities and other risky assets to seek safe haven in the greenback: the US continues to have the deepest, most developed capital markets and the most stable geopolitical profile, making dollar-based assets the venue of choice for risk-averse investors. Further, the Dollar was the “least bad” play in a global recession scenario because US policy makers were first to cut rates, introduce fiscal measures, and otherwise stimulate the economy, suggesting the US would lead in the eventual rebound.
This week’s dual upswing in both stocks and EURUSD raises an important question: is risk aversion off the table as a driver of US Dollar strength? Some early signs of returning confidence are certainly being noted: UBS AG, a major bank, revealed this week that American hedge funds have become net buyers of US stocks for the first time since October. In the month to March 13th, purchases of equities by UBS’ hedge fund clients averaged $140 million, snapping 22 consecutive weeks of net capital outflow.
Has Risk Appetite Returned to Stay?
There are substantial reasons to believe that the current rebound in risk appetite temporary, leaving the door open for a return to safety-driven demand for the US Dollar in the near term. While economic forecasts from central banks, financial institutions and international bodies like the World Bank do not necessarily agree on the minute details of their 2009 growth forecasts, the overall picture is decidedly grim. The International Monetary Fund has been particularly explicit, calling for the worst contraction in global output since World War II. This bodes ill for demand and will almost certainly be reflected in disappointing earnings reports, keeping downward pressure on stock exchanges across the world.
Evaluating technical positioning, we see that the MSCI World Stock Index has been confined in a downward sloping channel since mid-October. The current rally began with a bounce at the bottom of this formation, and while there is still room to go until the channel top is tested, its downward slope argues for a bearish bias on risky assets for the time being. Topside is resistance is further bolstered by the presence of a falling trend line established from the highs in May of last year. Together these will present a substantial hurdle for risky assets, suggesting further losses lie ahead.
Risk Aversion Aside, Euro is Still Likely to Fall Against the US Dollar
Taking risk aversion out of the picture, the case for EURUSD losses still looks compelling. The latest economic forecasts reveal expectations that US economic growth will outpace that of the Euro Zone by the second quarter of this year, with differentials remaining in favor of the States into 2010. This suggests that the US Federal Reserve will lead the European Central Bank in starting to raise interest rates to rein inflationary pressure from the massive liquidity injections seen in recent months.
Further, the US government is almost certain to issue billions in Treasury bonds to finance the tremendous amount of deficit spending that has been undertaken to combat the crisis. This likely flood of government debt will send Treasury prices lower add substantial upward pressure at the long end of the yield curve. The US fiscal effort dwarfs anything that has been undertaken in the Euro Zone thus far, suggesting yields on US government bonds will see a far greater boost from new debt issuance and thereby become more attractive to investors than their European counterparts. All told, this scenario amounts to strong demand for the greenback and dollar-denominated assets at the expense of their Euro-based equivalents, pushing EURUSD lower.
The speed and magnitude of the rally in EURUSD seen in recent days has rightfully sparked questions about the possibility of a sustained rebound. The hint of a reversal in risky assets has fueled the notion that the single currency has put in a credible bottom against the greenback considering the pair’s iron-clad correlation to stock markets in recent months. However, current evidence suggests that the Euro is set for further losses against the US Dollar whether or not risk aversion returns into the picture.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro / US Dollar : Is the Down Trend Over?
What is Forex?
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 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.
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!