USD - Dollar Recovery Continues
The Dollar rose yesterday against most of its major rivals as riskier currencies fell out of favor. Despite strong gains in U.S. equities, the Dollar gained ground as the likelihood of further European Interest Rate cuts loom over the currency markets. At the end of the Thursday's trading, the EUR/USD was little changed, despite high volatility most of the day. The USD/JPY closed higher at 98.32 from 97.77. Against the Pound the Dollar also finished higher at 1.4481 from 1.4585.
The dramatic sell off of the Dollar appears to have ceased as yesterday's trading was characterized by reduced market risk and future Interest Rate levels. The Dollar was sold heavily last week, sparked by the announcement that the Federal Reserve will begin a quantitative easing program. Slowly the currency markets are returning to relatively normal trading patterns as traders see little reason to take risks on higher yielding currencies in the face of the economic downturn.
Today's trading may be characterized by a glut of economic indicators surrounding consumer spending and attitudes. Due today are personal spending numbers and a revised consumer sentiment report. A better than expected result in the data releases could provide another boost to the Dollar as the currency continues to recoup its losses from last week. Look for the EUR/USD to drop below the 1.3500 level today.
EUR - EUR Set for Further Rate Cuts
The EUR experienced mixed results yesterday as the market begins to price in potential Interest Rate cuts to the European currency. Minor declines were seen against the Dollar, but the EUR climbed consistently against its other currency crosses. The EUR/JPY finished the day higher at 133.41 from 1.3267, and the EUR/GBP ended up at 0.9368 from 0.9301.
Market participants are set to start pricing in the potential for another Interest Rate cut by the European Central Bank (ECB). The ECB is scheduled to meet next week to decide if European Interest Rates will need to be trimmed from their current rate of 1.5%. One politician weighing in on the matter was British Prime Minister Gordon Brow. In a press conference; Brown said he expects that the European benchmark rate would fall below its current level. Perhaps Prime Minister Brown is short on the EUR for obvious reasons.
Traders today will want to pay attention to a few important releases from the Euro-Zone economy and Britain. From Europe we will see new industrial order numbers. This indicator is forecasted to show worsening numbers that highlight the deep recession that plagues Europe. Also we will have Britain's current account figures released. This number may have the potential to surprise the market. Better than expected results could add some buoyancy to the GBP against the EUR in today's European trading session.
JPY - Yen Foresees New Resistance Level
The Yen suffered during yesterday's trading; sliding against the Dollar, but in early morning hours of the Japanese trading session the trend began to reverse. Recent gains in equity markets have proven to be troublesome for the Yen. The Japanese currency has traditionally been used as a safe haven asset, but recent safe haven currency movements have not been kind to the Yen. Perhaps this is due to the underlying weakness in the Japanese economy and the rapid decline of the country's export sector.
The Yen slid against the Dollar to 98.32 from 97.77. Against the Pound the JPY finished down slightly at 142.40 from 142.63. The JPY's most notable loss was against the EUR, as the EUR/JPY level finished up 74 pips at 133.41. The financial year in Japan wraps up at the end of March. With the New Year coming, so may be the 100.00 Yen mark against the Dollar. The resistance level is significant as the USD/JPY has not touched on this valuation since the beginning of November.
Crude Oil - Crude Oil Prices Soar
The price of Crude Oil soared in Thursday's trading session, adding to big gains in the past several weeks. Crude prices finished up slightly over $1.50 or 3% at $53.81. Helping the commodity continue its price appreciation has been the recovery of U.S. equity markets from their New Year lows. What has also helped Crude prices as of late is the increased optimism by from investors, which was initiated last week by a string of positive economic data releases from the U.S.
An uptrend is showing in the last two weeks of trading with a host of a number of factors working in favor of rising Crude Oil prices. The rally in stocks has correlated with the rise in price of Crude Oil. It has also raised hopes that a spike in demand may be coming along with it. Adding support to the price appreciation has been the steadfast commitment by OPEC to continually reduce the supply of Crude Oil. Combine this with a weak U.S. Dollar and it makes for a rally in the price of Oil. Traders may look for a short term price cap of $55 to take profits.
Article Source - Dollar to Move Today on Release of Economic Data
As another analyst points out, however, ascertaining the role of risk aversion in the markets has become somewhat circular: “Observers…draw this assessment purely from price action. Rising equities means the market is less risk averse. And the way we know there is less risk adversity is that the stocks have rallied.” Applying this argument to forex, softening risk aversion is contributing to a stronger Pound. At the same time, observers point to the rising Pound as a signal that risk aversion has softened. In short, the safe-haven trade is surely not the most convincing explanation.
In fact, by all accounts, the Pound should be falling. The latest data shows that retail sales plunged by 1.9% on a monthly basis. GDP is projected to fall to such an extent that “in 2009 Britain will slip to 12th place (from 7th in 2007) among the 15 ‘old’ members of the European Union, behind all except Spain, Greece and Portugal.” Meanwhile, the Central Bank of the UK has warned that Britain’s government finances have become so fragile that the government will have difficulty carrying out new spending plans. Investors have taken note, and demand for the latest auction of UK government bonds is believed to be the “lowest in history.”
Given all the bad news, perhaps the Pound’s recent rise can be best attributed to technical factors. “The $1.45 level represents so-called resistance on a descending trend line connecting the January high of $1.5373 and the February peak of $1.4986.” Given that the Pound has since sunk back below $1.45, it can be reasonably discerned that a cluster of sell orders were executed at this level.
Over the longer-term, the prognoses for the UK economy generally, and the Pound specifically, are not good. Thanks to a low exchange rate, inflation is actually rising. It is perhaps a welcome development, since it indicates that the UK was (temporarily) averted deflation, but it could also be a product of the quantitative easing plan announced earlier this month, whereby the Bank of England will flood the banking system with newly minted money.
Key Overnight Developments
• New Zealand Economy Shrank at Fastest Pace Since 1992
• NZ Trade Balance Rises as Imports Fall More than Exports
• Japan’s Annual Retail Sales Fall Most in 7 Years
The Euro added 0.4% while the British Pound rose 0.3% against the US Dollar in overnight trading. The greenback retreated as stocks extended the biggest weekly rally since late August 2007, with the MSCI Asian Pacific Index trading 0.6% higher.
Asia Session Highlights
New Zealand’s Gross Domestic Product fell -0.9% in the fourth quarter, bringing the annual rate of decline to a 17-year high of -1.9% in the year through December 2008. Yesterday, the International Monetary Fund said they expect New Zealand’s economy to shrink about 2% through 2009, noting that “households are constrained by high debt levels, falling house and equity prices, and uncertain employment prospects.” Still, overnight index swaps suggest the market is pricing a limited scope to further interest rate cuts, calling for at most a 25 basis point cut in April and no net change in a year from now.
Separately, the Trade Balance deficit narrowed substantially more than economists expected in February, showing a monthly surplus of NZ$4.8 billion. The annual trade deficit, a more accurate measure of the trend in trade flows because of the volatility in month-to-month data, narrowed for the second consecutive month to print at –NZ$5.2 billion in the year to February. While this looks good on the surface, the improvement in the headline figure came not from robust export growth but rather owed to the impact of deepening recession on consumer spending. Indeed, imports fell at an annual pace of -14.2%, outpacing the -6.6% drop in exports.
In Japan, Retail Sales fell for -5.8% in the year to February, the most in 7 years. Dwindling overseas sales are continuing to push Japanese companies to cut back production capacity, boosting unemployment to put downward pressure on consumer spending and overall economic growth. Deepening recession is beginning to translate into deflation: the Consumer Price Index slipped into negative territory for the first time in 16 months in February, shrinking at an annual pace of -0.1%. The current downturn could substantially accelerate if expectations of falling prices become entrenched, encouraging consumers and businesses to perpetually put off spending and investment waiting for the best possible bargain, thereby putting the brakes on economic growth altogether.
Euro Session: What to Expect
Germany’s Consumer Price Index is set to add a meager 0.1% in March, bringing the annual pace of inflation to a 6-year low at just 0.7%. Anemic economic performance has pressured price growth lower as Germany struggles increasingly deepening recession. The economy shrank -1.7% in the fourth quarter and current expectations call a -2.5% contraction through 2009, the deepest downturn since World War II. The slump is set to push inflation into negative territory, threatening to amplify the current malaise as expectations of falling prices encourage consumers and businesses to wait for the best possible bargain, perpetually putting off spending and investment.
For their part, the European Central Bank is expected to respond with an additional 25 basis point interest rate cut on April 2nd, with borrowing costs set to bottom at 1% through the second quarter. The ECB’s hesitation to commit to aggressive easing may pose substantial political risks down the road: calls to un-tether national monetary capabilities from Trichet’s measured approach are likely to find greater favor as the downturn hits home for an increasing percentage of Europeans, threatening to aggravate electorates against currency union. The reality of this structural threat to the Euro was reinforced earlier this week as the ECB President visibly tried to downplay it in a recent Wall Street Journal interview.
In the UK, the final revision of fourth-quarter Gross Domestic Product is expected to confirm that the economy shrank -1.5% in the three months to December 2008, the most in nearly three decades. Retail Sales fell substantially more than expected yesterday as rising unemployment continued to weigh on consumption, threatening to deepen the current downturn. The IMF has predicted that the UK will see the worst recession among the G7 nations. Separately, the Current Account deficit is set to narrow to -5.9 billion pounds in the fourth quarter, down from -7.7 billion in the three months to September. The reading suggests that trading terms deteriorated at an annual pace of 12.1% through 2008.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro Higher as Stocks Rebound But Data Threatens with German CPI to Hit 6-Year Low (Euro Open)
• Trader Sentiment And Risk Appetite Hinge On Next Weeks G 20 Meeting
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The market’s barometers of risk are showing steady improvement, just like many key instruments; however, the burden of uncertainty and threats of financial shocks are just greater now than they were a few weeks and months ago. Market participants are now left to discern whether the rebound in relatively high yield/ high risk assets is genuine or a relief rally as the eye of the storm passes. Taking measure, we can see that most of the favored gauges for market sentiment are producing impressive improvements. Each day the equity market climbs, news headlines splash impressive statistics of its performance. For example, now at a four-week high, the S&P 500 is working on its best monthly performance in 35 years. Elsewhere, credit default swaps have dropped to their lowest levels in five years while the TED spread (the difference between the rate on the three-month US government notes and equal tenor Libor) has held close to its multi-year lows. It is the currency market however that provides the most interesting readings as reflects the seeming rebound in risk while also showing the changes that have developed between a calm in current market conditions and those from just a few years ago. The Carry Trade Index is in its most consistent rally since Spring of 2008 while the DailyFX Volatility Index extends its drop from December highs. On the other hand, it is no longer clear which currencies are safe havens and which promise outsized returns. If the outlook for health of the global financial system and economy were clear, this would not be an issue.
Indicators are frequently misinterpreted; and sometimes lose their relevance in certain market conditions. Considering the fundamental uncertainty that persists across the world, it is prudent to remain skeptical of the immediate recovery of investment confidence that will precede an influx of capital back into the speculative markets. This past week, policy officials increased their efforts to prevent what is now a severe recession from turning into a depression. Definitions for this state are loose, but its essential components are a sustained downturn in growth; high volatility in exchange rates; bankruptcies; severe restrictions on credit; and stunted trade. All of these circumstances have been met to this point; and a few of them are set to deteriorate further. At this point, the health of the global economy and the flow of money is a problem that must be addressed by every nation. However, only a few major players have made the effort with introducing massive stimulus plans, funds meant to draw out toxic debt, guarantee sound investments and bolster liquidity. This is the contention that leaders from the US and UK will bring with them to the G-20 summit on April 2nd. If there is no tangible and coordinated plan to come out of these meeting of nations, this rebound in optimism may very well collapse. With growth expected to slow further in the first half of 2009, protectionist threats rising and options running short; the future is fragile.
Written by John Kicklighter, Currency Strategist
Article Source - Trader Sentiment And Risk Appetite Hinge On Next Weeks G 20 Meeting
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.
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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.
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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.
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Why to trade on Forex?
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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!