USD - U.S. Unemployment Claims on Tap
The U.S. Dollar weakened during yesterday's trading session, correcting the sharp gains against the EUR and GBP seen last week as steep job losses in the private sector rekindled fears of a prolonged U.S. recession. After yesterday, the USD fell slightly against the EUR, pushing the oft-traded currency pair to 1.3270. The Dollar experienced similar behavior against the Pound and closed at 1.4490.
The ADP Non-Farm Employment Change released yesterday showed an additional 742K individuals lost their jobs in the U.S during the month of March. The number was far higher than economists had previously forecasted. This is indeed another sign that any economic recovery in the U.S. will be slow to commence.
Another leading indicator released yesterday was U.S. Pending Home Sales. This number handedly beat market expectations but failed to provide strength to the Dollar as investors may be waiting for key data due to be released today to implement their trading strategies.
As for today, the leading U.S. data will be the Unemployment Claims. The survey is expected to show 649K individuals have filed for unemployment insurance for the first time during the past week. Such a result will be a direct continuation of the recent troublesome figures delivered lately from the U.S. economy and is threatening to hurt the USD. Traders should follow it closely, as any crucial information might ignite a new trend in the market.
EUR - EUR Fluctuates as ECB Interest Rate Decision due Today
The EUR finished yesterday's trading session with mixed results versus the major currencies. The 15-nation currency saw moderate gains versus the USD. Versus the JPY, the Euro-Zone currency range-traded throughout most of the day, as much of the market data from yesterday was focused on the greenback.
Retail Sales in Germany unexpectedly fell in February and the rate of unemployment rose, fueling fears about job security. As a result, European companies have stepped up efforts to reduce production and cut jobs as the worst global slump since World War II. German business confidence fell to the lowest level in more than 26 years in March and unemployment increased for a fifth straight month.
As a result, the ECB is expected to cut its Interest Rates today while other governments embark on state-sponsored investment programs. The market may view the ECB action of a rate cut as a step to restore investor confidence, and to mitigate the economic fallout from the financial crisis.
In the last year, the ECB has been less aggressive than the Federal Reserve in monetary policy and as the financial crisis has worsened in Europe, the EUR has steadily fallen against the USD. However, the ECB plans for cutting Interest Rates might have an effect on the Euro-Zone economy and could reassure the European banking sector that they could rely on the ECB to keep liquidity circulating and also bring more confidence to the markets.
JPY - Yen Experiences Mixed Results against Major Currencies
Japan's business confidence hit a record low after slumping global demand has halved the nation's exports, pushing the country into one of its worst recessions. Rising unemployment and falling spending data a day earlier already showed the worrisome trend that the drop in external demand was affecting Japan's domestic economy. Analysts expect the Japanese economy to continue to contract in the first half of this year, lending a record five straight quarters of negative economic growth.
Today, the JPY will be absent from the economic calendar, however, traders should follow overseas events in order to determine the JPY's direction for today. Special attention should be given to the ECB Press Conference and U.S. Unemployment Claims figure that will be published at 11:45 and 12:30 GMT respectively, and will be today's leading publications that could affect the Yen's crosses.
OIL - Crude Oil Sinks below $49 a Barrel
Oil prices fell slightly during yesterday's trading session and closed below $49 a barrel as more signs of a sick economy fueled worries about energy consumption. The International Energy Agency (IEA) said that Crude Oil inventories rose to 359.4 million barrels, which is 15.5% above levels from one year ago, the highest level since 1993. Some analysts have said Crude Oil is waiting to break out from it's price slump but the negative inventories data may have held that rally in check..
Oil prices rose sharply last month from $35 to above $54 taking their cue from a rally in equity markets. But a new sign of a prolonged recession which has crushed energy demand around the world is again pushing prices lower below the psychological price level of $50.
Article Source - EUR Interest Rate Decision Due Today
Key Overnight Developments
• Australian Trade Surplus Higher Than Expected on Gold Export Demand
• New Zealand Commodity Export Prices See First Rise in 8 Months
• Euro, British Pound Rise as Asian Stocks Follow Wall St Higher
The Euro added as much as 0.5% in overnight trading while the British Pound advanced 0.4% as stocks pushed higher across Asian exchanges, weighing on the safe-haven US Dollar. The MSCI Asia Pacific Index surged 3.6%, following a rally on Wall St sparked by better-than-expected US economic data and encouraging comments from US Treasury Secretary Geithner, who said global stimulus efforts are showing “traction”.
Asia Session Highlights
Australia’s Trade Balance showed a much greater surplus than economists expected, printing at A$2.1 billion in February versus expectations of a A$0.7 billion result, the seventh consecutive month in positive territory. The improvement was driven by a -3.5% drop in imports while exports increased for the first in fourth months, adding 7.7%. The uptick in outbound shipments was driven by a 55% surge in gold, likely driven by demand for store-of-value assets as central banks around the world buy billions in government and private-sector debt with printed money to lower borrowing costs and boost access to lending (a practice commonly referred to as “quantitative easing”). Importantly, it remains to be seen if gold demand has staying power as it becomes clear that rapid inflation is not entirely guaranteed as a consequence of quantitative easing. Still, trade data may continue to improve as lackluster consumer spending amid the deepening economic downturn pressures import volumes lower.
The ANZ Commodity Price Index of New Zealand’s top export goods saw positive gains for the first time in 8 months in March, rising 1% following a -4.6% drop in February. The CRB/Reuters Commodity Price Index jumped 2.9% through March as risk appetite rebounded across financial markets. Importantly, we continue to see substantial reasons conclude that the upswing in risky assets is temporary in the scope of a larger down trend: growth forecasts remain grim for 2009, suggesting weak demand will weigh on prices for some months to come. The recent appreciation of the New Zealand Dollar will also hurt the export sector, making the antipodean nation’s good more expensive to foreign buyers. A trade-weighted average of the currency’s value rose 11.7% in March.
Euro Session: What to Expect
The interest rate decision from the European Central Bank is the clear standout on the economic calendar for the forthcoming session. A survey of economists conducted by Bloomberg expects Jean-Claude Trichet and company to slash rates by 50 basis points to put overnight borrowing costs at 1%. Overnight index swaps tell another story however, with traders pricing the likelihood that only 25 basis points will be shaved off the benchmark rate. Interest rate futures offer a third scenario, showing traders are betting on a 75bps reduction. Mixed signals ahead of the release are likely to spark volatility with some traders caught on the wrong side of the market when the news hits the wires. The press conference following the initial announcement holds even more potential to stir price action. The ECB has been under the gun recently for being too timid in offering monetary stimulus as the Euro Zone sinks deeper into recession. Trichet has been teasing the market with promises to “study unconventional measures” beyond lowering the benchmark lending rate and sounded clearly defensive about criticisms that he is not doing enough in a recent Wall Street Journal interview. This will be his chance to give the markets something tangible; if it is wasted, the Euro is likely to see significant selling pressure as traders price in a longer path to recovery as well as the political implications of inaction. Indeed, grumbling electorates are likely to become more receptive to the notion that national monetary capabilities should be un-tethered from the ECB’s measured approach as the downturn hits home for an increasing percentage of Europeans, posing a serious structural threat to currency union itself.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro Selling Likely If Central Bank Remains Soft on Interest Rate Cuts (Euro Open)
Historically, these periodic gatherings of leaders from some of the world’s largest economies have yielded little. However, this time around, the sentiment seems to be that conditions are so dire and stability so fragile that these heads of state cannot afford to leave this meeting without an actionable plan to turn things around. Such a prognosis doesn’t guarantee cooperation though. And, in fact, there has been clear conflict in the demands and concerns that have been noted by key participants before the official meeting. With so many contingencies and scenarios; it is important to break down the major themes that will be broached, the probability of reaching an agreement on each topic and what impact it may have on the currency market.
The Major Issues
Globalization has been hailed as a means for increasing trade and spreading wealth around the world; but these positive consequences are espoused in times of strength. Now, with the World Bank forecasting a 2.1 percent contraction in global GDP through 2009, each nation is desperately looking for the means to bolster its own economy. As the plunge intensifies, however, there is a growing consensus that the only real solution to the borderless problem is a coordinated response from the largest players. On the other hand, conditions have not yet gotten to the point that where 20 of the world’s largest economies are willing to sacrifice their own agenda’s and policies to easily reach an agreement on the many problems that stand before them. Therefore we will only cover the three most publicized and potentially market-altering issues.
1. Global Regulation – In the period following the Dot.com bubble and preceding the current financial crisis, the markets were flooded with capital. Market returns grew to impressive double digit levels; and investors’ desires to generate profit above and beyond this benchmark led to the excessive use of leverage and the development of new financial derivatives backed by little or no tangible collateral. When the house of cards began to come down, it was this bottleneck that turned a downturn into a panic with frequent seizures in liquidity. Looking for the culprits to this dour state of affairs, global leaders have suggested better regulation of hedge funds and large pools of private capital, over-the counter derivatives markets, international banks, executive compensation, and supposed tax shelters. France has shown particular interest in this point ahead of the meeting and many other nations have set it as an agenda on their own, making it a key subject at the meeting.
Likelihood of G20 Policy: High – In determining the likelihood that policy makers will be able to come to an agreement on any single issue, success is measured by the possibility of stepping on the fewest toes. When it comes to regulating many of the obvious excesses that have led the global economy to its current state, there is likely to be little opposition. However, there are a few sub categories to this theme that will meet greater resistance – labeling a country a tax haven and defining sanction for example will be difficult to accomplish.
2. Coordinated Stimulus / Bailout – A duel financial crisis and economic recession has forced many of the world’s governments to inject liquidity in the markets, bailout key financial institutions and increase fiscal spending dramatically. There are very few countries that have not taken these steps to stabilizing their own economies. However, a coordinated requires significant compromise. Those nations that have suffered deeper contractions and have had to put more capital in the fire will require more spending from their counterparts. The International Monetary Fund’s (IMF’s) recommendation to use at least 2 percent of GDP towards financial stimulus will be a likely benchmark for those advocating increase spending.
Likelihood of G20 Policy: Low – A coordinated effort to increase financial stimulus brings with it heavy political connotations. To have the funds necessary to spend such incredible amounts of money requires a government to take on massive amounts of debt. Germany and France have both voiced opposition to such a move, leading the stance in the European Union that the 400 billion euros already dedicated to the issue would be enough. German Chancellor Angela Merkel has been among the most vocal opponents to this policy suggestion, suggesting that spending untold billions would instead feed the next crisis. This is a hot button issue and with only one day to work with, is unlikely to much progress.
3. New Reserve Currency – Since the birth of global trade and finance, there has been the need for a common unit of exchange to facilitate transactions and price goods. Before World War I, the world was on the Gold Standard. With the Bretton Woods System, the US currency was established as the new reserve by fixing a given amount of gold to a certain number of dollars. And, though this arrangement was abandoned in the 1970s, we have seen the dollar hold its defacto title through market interest alone. The greenback is held in central bank reserves, used to price commodities and is the peg for many emerging market economies. In record years though, there has been a slow but steady swap for over-weighted dollar holdings to something more akin to a basket. Nonetheless, the dollar is still by far the most commonly held currency and is in turn the most actively traded.
Likelihood of G20 Policy: Very Low – There has long been an argument for weaning the world off the ‘dollar standard,’ and for good reason. Using a single unit of exchange for so many different purposes exposes the world to the volatility of that currency. In light of the extreme conditions that have developed over the past 18 months, there is good reason for China and Russia (to vocal proponents of this point) to bring this consideration to the table. Even so, there is little probability that this issue will lead to a new “super sovereign reserve currency.” There are too many economies that rely on this standard and actually changing it would be a tall order. And, realistically, with the immediate health of the global economy and financial markets at stake, there are bigger problems to tackle.
What Currency Traders Should Be Watching
Dollar – The greenback is exposed to all of the major themes listed above. It is well known that the US has taken some of the most aggressive steps towards stabilizing its own growth and financial markets (and some say the effort has been aimed to bolster global growth and markets). If there is a coordinated effort that comes out of this meeting, it would take a lot of the pressure off the US government’s shoulders. On the other hand, a snub would work the currency’s safe haven status. Regulation has been a frequent point on the agendas of the US Congress and President; so an agreement on a global scale would offer little price action. And, clearly, the threat to the dollar’s reserve status is direct and prominent. Though the market considers such an agenda making it to a vote, the confirmation that its rank is unscathed will nonetheless encourage bullish sentiment.
Euro – It has long been the sentiment surrounding the euro that the Euro Zone was in a better position to weather the global crisis than its international counterparts and that its interest rates would be able to hold up for the eventual recovery (providing a yield advantage that could encourage a quick rebound in the currency). However, a ballooning domestic recession and local financial troubles have put these perceived advantages at stake. Should the French and German leaders given in to a coordinated stimulus effort, it would be taken as a sign that the Euro Zone is in no better a position than the US or UK. There will also be modest interest in the potential for sweeping regulation (as it would bring tax revenue) and the potential for a new reserve currency (the euro is the number two most actively traded currency).
British Pound – The UK is considered be in the worst economic shape of the industrialized world. There have been nine different initiatives introduced by Prime Minister Gordon Brown and the Parliament; yet Europe’s second largest economy has not seen the benefit of these proposals. There is no better country to use in arguing that the crisis is global and not the sum of many individual recessions. Should there be an agreement on a coordinated effort to recharge growth, it would likely be considered the most promising fix offered the United Kingdom and would be a significant relief for the British government and tax payer.
Japanese Yen – For more than a decade, the Japanese yen has had one role in the currency market: safe haven. However, fundamental function was thrown into question when a severe contraction in 4Q GDP led many to evaluate the true safety to the Japanese economy and its assets. Authorities have forecasted a harsh contraction through 2009 (even compared to a global economy that is forecasted to suffer its worst slump since WWII) and investors are growing more critical of the risk/reward in seeking liquidity and safety in Japan. Prime Minister Taro Aso has called on other global leaders to increase fiscal stimulus to promote growth in their own economies; and a coordinated effort to do so would be considered a benefit to growth and thereby demand for Japanese exports.
Written by John Kicklighter, Currency Strategist
Article Source - What The Market Expects - And Is Likely To Get - From The G 20 Summit
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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.
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