USD - U.S. Sees Worst Unemployment Figures Since 1983
Last week was mainly a bearish week for the Dollar. The USD dropped significantly against the EUR and the GBP. The EUR/USD crossed the 1.35 level, and the GBP/USD was traded at an almost two-month high, after reaching to 1.4890.
Last week was filled with important data regarding the U.S economy. First, the Manufacturing Purchasing Managers' Index was seen at a 5-month high after reaching the 36.3 mark. In addition, the housing sector in the U.S continued to show recuperating signals as the monthly Pending Home Sales rose by 2.1% in February. However, all this had little effect on the U.S Dollar as the Non-Farm Employment Change report climbed to a 25-year high with over 663,000 people losing their jobs in March, making it the fourth consecutive month in which the U.S economy lost more than 650,000 jobs.
With all respect to the improving housing sector, such horrifying figures are an immense warning sign for all those who feel that the crisis is now behind us and not ahead of us. The weakening of the greenback on almost all fronts was fairly expected in light of the problematic job sector.
As for the week ahead, a lot of extremely influential data will be published, and most attention will be focused towards two of them. First, the U.S. Trade Balance which measures the difference in value between imported and exported goods and services. Analysts expect that the deficit has continued to narrow throughout February. Second, the U.S Unemployment Claims, which measures the number of individuals who filed for unemployment insurance for the first rime during the past week. This week the report will have an even stronger impact than it usually does, as investors are anxious to see whether the poor job sector in the U.S. is likely to continue. Traders are advised to pay attention to these publications and set their positions on the USD accordingly.
EUR - The EUR Continues to Strengthen against the Majors
Last week the EUR underwent bullish trends against most of its major currency counterparts. The EUR/USD rose to about 1.3580, and the EUR/JPY reached the 136.80 level. However, the EUR saw a falling trend against the GBP throughout most of the trading week.
The most significant notification which came from the Euro-Zone over the past week was definitely the European Central Bank's (ECB) decision to cut interest rates to 1.25% from 1.50%. Normally, when a region announces its cutting interest rates, the automatic reaction to it is the weakness of the local currency. However, this time, on a fascinating turn of events, the exact opposite effect took place. A reason for this is as follows: for about a month now, analysts have anticipated that the ECB will have no choice but to cut interest rates, as the European interest rate was much higher than those in the U.S, Japan and Great Britain; however, for the past week or so, everyone was under the impression that the ECB will cut interest rates at least by half a percent. When it was announced that the ECB will cut interest rates by only 0.25%, most investors were caught by surprise, which caused them to reevaluate their positions, concluding in a very strong bullish trend for the EUR.
As for this week, traders are advised to focus on the German economic data. On Wednesday at 10:00 GMT, the monthly German Factory Orders will be published. This report, which measures the change in the total value of new purchase orders placed with manufacturers, is expected by analysts to drop for the sixth consecutive month. On Thursday at 10:00 GMT, the monthly German Industrial Production report, which measures the change in the total inflation-adjusted value of output produced by manufacturers, is expected by analysts to drop for the sixth consecutive month as well. If the real results will be similar to the forecasts, the current trend may reverse, and the EUR/USD could significantly drop. Traders should follow the announcements and try to make profits from the effects of these results.
JPY - The Yen is Losing Ground on All Fronts
The JPY saw an extremely bearish session last week, and it will be certain to say that if you went short on the JPY, you now have more funds in your equity than you had before. The USD/JPY for example, has crossed the 100.00 barrier for the first time in six months.
Two reasons have led to the JPY's downfall over the past week. One, two very important Japanese economic indicators delivered unfortunate figures. The Preliminary Industrial Production, which measures the change in the total inflation adjusted value of the output produced by manufacturers, dropped by 9.4%, making it the fifth drop in a row. In addition, the Tankan Manufacturing Index, which measures general business conditions, dropped to a -58 mark, reflecting a 34-year low. The second reason for the weakness of the Yen is the Japanese economic policy that tries to do its best to encourage the local exporting and believes that the best way to do this is via a weak currency. These are the main reasons for the Japanese low interest rates, which are made to keep the Yen as weak as possible.
As for the week ahead, the most significant data expected from Japan will be the Overnight Call Rate, on which the Japanese interest rates for April will be revealed. As for now, the Bank of Japan (BoJ) is widely expected to leave it at 0.10%, as it can't really drop it further. In conclusion, unless sudden changes will take place, the JPY will probably continue to face downtrends against the major currencies in the upcoming week.
Crude Oil - Could Crude Oil Reach $55 a Barrel?
Crude Oil's prices continued to rise during last week's trading session. A barrel of oil has breached through the $50 price for the first time in two weeks, and it is currently valued for over $53.00 a barrel.
It appears that Crude Oil is rising on speculations that the global economic stimulus decided on at the G20 meeting will indeed put an end to the recession, and with the beginning of 2010 we might even see the first signs of global growth. All of these speculations have led investors to think that the demand for oil will increase dramatically throughout 2009. In addition, the deteriorating USD has also contributed to the spike in oil prices as Crude Oil is valued in Dollars.
Looking ahead to this week, traders are advised to watch carefully after the leading stock markets and the major economic indicators which will be published from the U.S. and Euro-Zone in order to predict the next movements in oil prices. Nevertheless, in case the USD continues to weaken as it has lately, $55 a barrel seems like a very realistic target for this week.
Article Source - USD-Confidence Weakens after Poor Economic Data Released
Key Overnight Developments
• Australia's Annual Inflation Fell in March, Says TD Securities
• Japan’s Leading Index Drops to Lowest Since 1983 in February
• Euro, British Pound Capitalize as Asian Stocks Extend Rally
The Euro and the British Pound gained against the US Dollar in overnight trading as Asian stock markets rose for the fourth consecutive session. While risky assets have staged an impressive rebound over recent weeks, technical positioning hints the upswing is corrective in the context of a larger downtrend.
Asia Session Highlights
Australia’s TD Securities Inflation fell to 2.6% in the year to March, down from 3.1% in the preceding month. Signs of slowing price growth give the Reserve Bank of Australia more room to surprise economists calling for rates to remain at 3.25% with a rate cut at a policy announcement later this week. Traders seem to agree, with overnight index swaps pricing in a 0.25% reduction this time around and between 50-75 basis points in total easing over the next 12 months. Early signals coming out of the central bank itself also hint at a dovish bias: Governor Glenn Stevens recently reiterated that lower benchmark rates remain an effective way to stimulate lending while his assistant Ric Battellino noted last week that annual output is “likely to fall in 2009”.
Preliminary estimates showed Japan’s Leading Index fell to 75.2 in February, the lowest in 26 years. The metric tracks a variety of leading indicators (including inventories, machine orders and stock prices) and is intended to forecast the economy’s trajectory over the coming 6-9 months. The reading compounds expectations of deepening recession in the world’s second-largest economy.
Euro Session: What to Expect
The Euro Zone Producer Price Index is expected to print in negative territory again in February, shedding -0.5% from the previous month to put the annual pace of wholesale inflation at a decade-low -1.5%. The release foreshadows lower consumer prices (the headline inflation gauge) as firms pass on lower production costs through cheaper finished goods. A separate report is set to show that Euro Zone Retail Sales fell -2.5% in the year to February, a reading uncomfortably close to the record low at -3.1% seen in June. A shallow rebound April’s Sentix Investor Confidence measure to -40.7 from the all-time low at -42.7 seems hardly good enough news to inject any lasting optimism into the currency bloc’s medium-term economic outlook.
Despite tumbling prices and deepening recession, the European Central Bank cut interest rates less than economists expected last week. In the press conference following the initial announcement, bank president Jean-Claude Trichet said rates had not reached “the lowest limit” and revealed that “the Governing Council intends to decide on further non-standard measures at our next monetary policy meeting”. It seems the ECB has been playing for time since March, first promising to “study unconventional measures” and now committing to making a decision on quantitative easing when policy is announced in May. Trichet’s notably defensive rhetoric, apparent both in his boasting about that “[the ECB’s] balance sheet is larger as a proportion of GDP than that of the Federal Reserve System” as well as in a recent Wall Street Journal interview, is unwittingly legitimizing concerns about the structural integrity of currency union itself. Indeed, such comments seem intended to placate grumbling electorates, increasingly receptive to freeing national monetary capabilities from the ECB’s measured approach as the downturn hits home for an increasing percentage of Europeans. While the day of reckoning may have been delayed for another month, the Euro could see significant selling pressure ahead if May brings further waffling, pushing traders to price in a longer path to recovery as well as the political implications of inaction.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro Rises with Stocks but Outlook at Risk as Recession Deepens (Euro Open)
Fundamental Outlook for US Dollar: Bullish
- ISM Manufacturing, pending home sales were better than expected
- G-20 meeting yielded few surprises, increased financial regulation
- US non-farm payrolls fell in line with expectations by 663,000, unemployment rate hits 25-year high of 8.5%
The US dollar was driven lower throughout last week as increased risk appetite only worked to the benefit of high-yielding currencies, and by Friday, the US dollar index settled right above intraday trendline support, which connects the March and early April lows, at 84.20. Where the greenback goes from here will depend, not surprisingly, on risk trends as fundamentals have yet to really matter again for the currency. Indeed, for the most part, US economic data has beaten expectations – with the exception of Friday’s NFP and ISM non-manufacturing figures – and yet the US dollar has continued to fall. As a result, it will be important to watch how US releases impact investor sentiment, and looking at the US economic calendar, Wednesday’s Federal Open Market Committee (FOMC) meeting minutes will likely be the big event to watch.
In March, the FOMC left the fed funds target range at 0.0 percent - 0.25 percent but the big surprise was that they officially announced quantitative easing efforts. Since this information has already been revealed, the release of the minutes may not be very market-moving, but they will likely add to indications that the FOMC will leave the target unchanged throughout much of 2009 and that they will continue to use the central bank’s balance sheet in an effort to improve credit conditions. The one thing that may capture the market’s attention is the FOMC’s long-run projections for growth, unemployment, and inflation as revisions that indicate that the outlook appears to be even worse than previously anticipated could hurt risk appetite throughout the financial markets, and thus lift safe-haven currencies like the US dollar. However, if the revisions go unchanged, traders may shrug-off this once critical release.
Euro Strength Dependent On Outlook For Risk And Interest Rates
Fundamental Outlook for Euro This Week: Bearish
- ECB cuts rates less than expected, leaves the dour open for further cuts
- Euro area inflation cools and German joblessness rises – entrenching the regions recession
- The euro has yet to forge new highs. Read the Technical Weekly report for a different view of the market
The pressure has seemingly been taken off the European economy with the announcement of bold policy objectives from the G20; and a smaller than expected ECB rate cut has once again left the forecast for the Euro Zone interest rates at an advantage to many of its global counterparts. This seems to be the ideal outcome for the euro; but is this really the case? To really gauge the euro’s strength, we have to consider the general level of risk sentiment in the market, the potential for unseen threats to the regional economy and the likelihood that the central bank will be able to avoid the desperate policy efforts of their US and UK counterparts.
Before considering the euro’s position on the spectrum of currency market strength, you need to first have a feeling for the general mood in the market. Sentiment seems to be improving and has been for the past few weeks. However, this isn’t finding much support from growth and expected return forecasts. Recession has seized the global economy and even conservative estimates see the slump extending at least into the second half of the year. This means, that speculative capital finding its way back into the market (from money market accounts, government debt and other relatively ‘risk-free’ assets) will require a very high level of safety and returns that can compensate for risk that will likely remain elevated for quite some time. The euro will struggle to make the grade on both fronts. For returns, the Euro Zone seems to have a leg up thanks to a 1.25 percent benchmark rate. However, this primary rate doesn’t have the same flexibility that its Australian and New Zealand counterpart have to further lower rates - should economic and financial conditions warrant it - and still come out with an attractive yield advantage. ECB policy officials clearly see the disadvantage of rates near zero, but they are running out of options and time. In his public address, President Trichet suggested the current rate was not necessarily a floor and that the central bank would announce its decision on pursuing unusual policy tools next month. This may include quantitative easing, purchasing additional private debt or any other number of possibilities; but for the euro trader, it will mean conditions in the Euro Zone are just as bad as they are in the United States and United Kingdom.
It will take time and many exogenous fundamental shifts from within the Euro Zone and the broader market for the larger fundamental themes described above to play out; but in the meantime, event-driven traders will still have a hearty round of economic releases to work with. Immediately diving into the health of the financial markets, the forward looking Sentix Investor Sentiment gauge will offer a look at confidence from a group that is the most economically educated and directly vested group in the entire economy. The expected rebound comes after record lows and wouldn’t include the influence that the G20 statement had on the crowd however. Also from the Euro Zone, we have the retail sales and final 4Q GDP reading. Both are lagging indicators; but they will stand as a reminder of what conditions the economy is truly in. the German docket offers the more interesting mix. Trade figures have been somewhat overlooked recently, but Europe’s largest economy (and the most vocal against extending its fiscal stimulus) may change its tune to injecting more aid into its economy if its still-strong trade links diminish and exacerbate anemic domestic demand. Factory activity and orders will further offer a good leading indicator on the likely trend in general growth, employment and trade. Most of the European markets will be closed Friday for the Good Friday holiday.
Japanese Yen Could Rise Amid Technical Corrections
Fundamental Outlook for Japanese Yen: Bullish
- Japan’s jobless rate hit 2-year high, household spending down for 11th straight month
- Bank of Japan’s Tankan index plunged to the lowest level since recordkeeping began in 1974
- G-20 summit offers few surprises, takes no stance on currencies
The Japanese yen was the worst-performing G10 currency through the past week’s trade, as a clear (if temporary) improvement in financial risk appetite led the currency substantially lower against higher-yielding counterparts. However, any sort of turn in the latest resurgence in risk appetite has the potential to drive “risky” assets lower, and the Japanese yen – along with the US dollar - continues to be a prime recipient of such fear-related money flows. JPY price action in the week ahead will subsequently depend on the trajectory of the US S&P 500 and other key risk barometers. That being said, predicting short-term price action in extraordinarily volatile assets remains nearly impossible. We would otherwise look to key economic event risk out of any given economy to dictate price action in the domestic currency, but FX traders have proven almost completely indifferent to Japanese economic fundamentals. As a result, it may be best to defer to broader price and risk trends as far as the Japanese yen is concerned, but given the sharp declines that the currency has experienced over the past month, the yen may be vulnerable to a technical corrections higher.
That said, it’s always good to keep tabs on the health of the Japanese economy, which remains dour. This week, the leading economic index is forecasted to slump further, reflecting nearly non-existent domestic demand and pessimistic investor confidence. Meanwhile, the Bank of Japan is widely anticipated to leave rates unchanged at 0.10 percent this week, as they will likely do throughout 2009. The thing to watch here is the potential impact that the bank’s meeting minutes could have on risk appetite, as indications that BOJ officials have judged that the current economic situation is deteriorating more rapidly than previously anticipated could weigh on the Nikkei, but lift the Japanese yen purely as a result of flight-to-safety.
British Pound Will Follow The BoE Rate Decision Despite Forecasts
Fundamental Outlook for British Pound: Bullish
- Despite a lack of details on executing its proposals, the G20’s assurances benefit the pound
- Consumer credit contracts for the first time in 16 years through February - a sign of dour economic conditions
- A two month high in GBPUSD hints at a reversal. Read the Technical Weekly report for a different view of the market
The British pound has charged ahead through the close of the week with a break to a two-month high against the US dollar and a near five-month high against the Japanese yen. These are strong moves; but do they necessarily reflect the strength of the sterling itself or is this more the reflection of a rise in risk appetite? Both the US dollar and Japanese yen are key safe haven currencies (which rise when traders are seeking to avoid waves in the financial markets and falling when the appetite for risk picks up). The better scale for the pound are euro and Australian dollar – both of which are still stronger than the British currency. However, will this be the case next week and the weeks beyond? For sterling traders, the long-term concerns still apply (even when measured up against an increasingly spread field of counter-currencies): is the United Kingdom the worst performing economy in the industrialized world; and is the country’s financial system set to suffer from additional implosions of key financial institutions?
To gauge this currency’s dependency on risk appetite, we can look back to last week’s top economic event – the G20 meeting. The market has generally accepted the IMF’s forecast that the United Kingdom would suffer the worst recession in the industrialized world through 2009. This is largely the reason for the Prime Minister Gordon Brown’s enthusiastic effort to produce a global and coordinated rescue plan that the group of international leaders would sign up to. With sentiment so pessimistic on the pound to begin with, the apparent success of the meeting easily leveraged a boost in sentiment for the pound. However, the policies laid out in the statement provides more sweeping proposals than the immediate action that investors and consumers were hoping for. Without clear timelines and contribution promises from members, skepticism will grow that fiscal aid will come close to stem the bleeding of the global economy. On the other hand, regardless of what global leaders can ultimately agree to, UK officials will continue to support their own economy. The government has shown a flexibility and timing with its policy that no other nation can match. While, the state of its economy and markets certainly warrants this response, it will eventually pay off while others could struggle to revive growth.
The impact of economic policy and health of one economy relative to its major counterparts are conditions that play out over a considerable time. In contrast, the event risk that populates the docket next week will have a far more immediate impact on price action – while further altering forecasts for the longer-term fundamental considerations. The list of scheduled releases due next week is certainly not lacking for potential. The most pressing event will be the Bank of England’s rate decision. Even though the MPC has cut rates to near zero (they are not expected to cut lowered any further; but even if they were, the market would not likely be surprised) and have been early adopters of unorthodox policy methods; the market will take heed of the group’s outlook. An improvement to the outlook for the economy and markets owing to the central bank’s and government’s efforts would be considered a key turn for the better for the pound. Such convictions must also be won by data. The consumer confidence report on Tuesday will gauge the consumer’s contribution to growth. Industrial production and visible trade will gauge the influence of two other major components of GDP. On Friday, the UK capital markets will be closed in observation of Good Friday.
Written by Terri Belkas, John Kicklighter, Ilya Spivak, John Rivera and David Song, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 04.06.09
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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