4.08.2009

Risk Aversion Returns to Forex as Hope from G20 Fades

The period leading up to the G20 meeting was generally marked by optimism and hopefulness. One commentator urged his readers: “Don’t write off the London G20 meeting. It could lay the foundations for fundamental global change, impacting currencies, gold and bond markets.”

On some level, the meeting probably did fulfill expectations. After only a few hours of discussions, the G20 agreed to “stricter limits on hedge funds, executive pay, credit-rating companies and risk-taking by banks. The summit also committed more than $US1 trillion to boost the resources of the International Monetary Fund and provide emergency cash to help distressed countries.”

Investors rejoiced and the markets rallied, with the Dow rising above 8000 points and capping “the best four-week rally since the week ending May 12, 1933.” Bulls can now retort that the stock market bust of 1929 took four years to recover, while the recession of 2008-2009 required less than one year. Forex markets also reacted “positively” to the G20 summit, lifting the Dollar above the important psychological barrier of 100 Yen/USD, and causing emerging market currencies to rise across the board.

Monday, however marked a return to business as usual: “Post-G20 euphoria, which had helped to boost market confidence about a global recovery, proved short-lived as investors once again focused on the continued risks to the banking system.” It was probably only a matter of time before investors drilled beneath the surface of the impressive-sounding G20 rhetoric and large numbers, into the nuts and bolts of the summit’s policy prescriptions.



The headline-grabbing $1.1 Trillion figure, for example, is somewhat misleading. Over half of the $500 Billion “pledged” to the International Monetary Fund has either not been raised or not been explicitly authorized. Then, there is $350 Billion in trade credit, most of which is either redundant or double-counted, since “trade financing is rolled over every six months as exporters get paid for their goods and repay the agencies that lent them the money.” The remaining $250 Billion is accounted for in the issuance of IMF synthetic currency to member nations. However, given that the synthetic currency derives a significant portion of its value from the Dollar and Euro, this program cannot be effective if the US and EU opt out, of which there is a real possibility.

The summit also failed to meaningfully address concerns of the continued ole of the USD as the world’s de facto reserve currency. The expansion of the IMF synthetic currency program represents an important starting point, but at this point, it looks like China and the other supporters of an alternative system will have to wait for the next G20 meeting, to be held in September.

One commentator captured this frustration quite well: “The G20 Plan…tries very hard to preserve and perpetuate the existing US helmed global financial and economic order. An act of commission, on the one hand— buttressing the IMF— and an act of omission, on the other— remaining silent on the position of the US dollar— bear testimony to this.”
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Greenback Gains as Market's Optimism Fades

The European single currency came crashing on Tuesday after data showed the Euro-Zone economy recorded its deepest ever quarterly fall in the 4-quarter of 2008. As a result, the currency market moved back to the U.S currency after optimism regarding the European economy faded. The USD which is seen as a safer bet than others currencies in times of market stress will likely keep drawing demand as investors stay away from riskier assets.



USD - USD Regains Lost Momentum from Under-Performing Stock Market

The USD has begun a moderate rally these past two days, starting from as high as 1.3575 against the EUR, the greenback is now trading near the 1.3175 price level. An even sharper price rally began this morning during the early trading hours when the release of poor stock data emerged from Wall Street. The negative economic outlook for first quarter stock performance has many traders returning to their safe-haven investments - namely, the U.S. Dollar.

After witnessing a sharp 70 point drop, the EUR/USD began to stabilize while maintaining its downward posture. Against the GBP, the greenback made similar gains, rising from 1.4950 yesterday to as high as 1.4682 in today's early hours. Surprisingly, the USD saw no significant change in value versus the Japanese Yen, which may lend strength to the notion that the JPY is also being picked up as a potential safe-haven. So long as stocks and other equities continue to under-perform, due to the weakening global economy and rising metal prices, the USD may regain its recently diminished safe-haven status and return to levels not seen in over two weeks, perhaps to the 1.3000 price by the day's end.

Looking over the economic calendar may lend some insight into how the USD will perform through the second half of this week. The ever-increasingly important report on Crude Oil Inventories is due to be released later today. If inventories continue growing it could signal a further lack of real growth in the economy and continue to push the USD higher throughout its pairs and crosses. On Thursday, of course, we will also see two highly important data releases: the US Trade Balance report and unemployment figures. Both are due to be released tomorrow at 12:30 GMT and will likely carry a heavy impact on the value of the Dollar.

EUR - EUR's Recent Depreciation May Not End This Week

The EUR has apparently taken a hit from the recent rally in the U.S. Dollar, and not just against the USD. Dropping against all of its major currency rivals, the EUR is poised to suffer a significant loss through the rest of the trading week. Trading as high as 1.3575 against the USD this week, the EUR is currently losing momentum and may continue to drop from its current location to as low as 1.3000. The 16-nation currency is witnessing similar losses to the GBP and JPY as well.

Many analysts claim that the Euro-Zone's primary currency is losing strength not because of an inherent weakness, but because the recent price rally was dependent on a resurgent stock market. As stocks and various other equities have experienced a sharp depreciation this week, the EUR's rally has begun to implode in on itself. Unless stocks begin to rebound once more, the EUR will likely continue its depreciation as other currencies, such as the USD and JPY, regain their safe-haven trading status.

As negative data continues to emanate from the Euro-Zone's regional economy, this consequential weakness for the EUR is apparently going to continue growing as well. The rest of this week's economic news doesn't appear to be offering any significant level of support either. With very few economic indicators being released during the second half of this week, there doesn't appear to be much in the way of stopping this downward momentum in the various EUR trading pairs.

JPY - JPY Pares Losses and Stabilizes as it Regains Trader Confidence

Somewhat surprising for the market this week is a sudden resurgence of support for the JPY. While continuously losing ground to all of its currency rivals in recent days, the Yen now appears to be regaining a portion of its previous safe-haven strength. As world stock markets released poor 1st quarter data, the USD witnessed a sharp appreciation against all of its currency rivals, except for the JPY. Two of the possible explanations are either that the JPY was unaffected by a rallying USD, which seems unlikely, or the Yen also received a small boost from the search for safe-haven investments.

The island currency experienced a roughly 50 point increase against all of its major pairs and crosses, save the USD, which is currently trading at 99.70. With very little information being released regarding the Japanese economy this week, the news events surrounding world stock markets as well as the U.S. Dollar are likely going to lead the market through Friday and into next week. Because of the deterioration of world stock markets, there is a distinct possibility that low-yielding, safe-haven currencies, such as the USD and JPY, are going to begin regaining some of their recent losses through next week.

OIL - Demand for Crude Oil Continues to Fall; As Does its Price

It appears that the recent steps taken by the Organization of Petroleum Exporting Countries (OPEC) to increase the price of Crude Oil have begun to lose their momentum. After 4 consecutive days of losing value, the price of Crude Oil currently sits just below $48 a barrel and could retain this downward momentum. As economic growth continues to provide data which indicates a further slump in demand, and as the USD rallies from poor stock market data, Crude Oil may devalue even further through to next week.

As U.S. Crude Oil inventories have illustrated these past weeks, demand for this commodity has witnessed a solid deterioration. This inventories report, which is due to be released at 14:30 GMT today, may indeed indicate that demand has continued to fall and traders could be seeing a decreasing price of Crude Oil through Friday and into next week. A price of $46 may be seen by the week's end.

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US Dollar to Extend Gains Against Euro, British Pound as Risky Assets Falter (Euro Open)

The US Dollar extended gains against the Euro and the British Pound as Asian stock exchanges followed Wall St lower on concerns about the impact of deepening global recession on the upcoming round of earnings reports. Key index futures are down over a percent ahead of the opening bell in Europe, pointing to further gains for greenback.

Key Overnight Developments

• UK Economy Shrank 1.5% in the First Quarter, Says NIESR
• Japan's Annual Current Account Fell 55.6% on Collapsing Exports
• Rebound in Australian Consumer Confidence is Temporary, Says Westpac
• Japanese Merchant Sentiment Improves For Third Straight Month in March

Critical Levels



The Euro lost as much as -0.7% against the US Dollar while the British Pound shed as much as -0.5% as Asian stock exchanges sold off for the second consecutive session to boost demand for safe-haven assets.

Asia Session Highlights



The UK economy shrank -1.5% in the first quarter of this year according to a GDP estimate from NIESR, a think tank. The statement accompanying the release said that the current downturn looks “very similar to that of the recession that began in the summer of 1979…if the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again.” The current slump has weighed on industrial output and pushed the unemployment rate to the highest in a decade, eroding disposable incomes and discouraging spending. Indeed, Nationwide Consumer Confidence dropped to 41 in March, matching the record low initially set in January. The Bank of England is expected to keep benchmark interest rates on hold at 0.50% later this week, but policymakers will almost certainly announce further quantitative easing measures as they scramble to check the slide in output.

Japan’s Current Account surplus printed slightly higher than expected in February, registering at 1.1 trillion yen. More tellingly, broad trading terms fell by a whopping -55.6% from a year earlier as the global economic downturn weighed on overseas demand to send exports tumbling 50.4% in the twelve months to February. Business confidence fell to a record low in the first quarter, suggesting that the slump will continue to boost unemployment and weigh on spending, deepening the worst recession since the Second World War. Yesterday, the Bank of Japan said the economy will continue to deteriorate “for the time being” and alluded to the possibility of deflation.

Australian Consumer Confidence jumped 8% in April according to the Westpac Banking Corp, rising by the most since August of last year. Westpac’s chief economist Bill Evans credited the government with the uptick, saying “the stimulus package is likely to be buoying consumers.” Fiscal measures currently in place call for a total of A$12.2 billion in cash handouts for individuals. Evans seemed skeptical about the rebound’s staying power, however, saying “disturbing signals from all the leading employment indicators” are likely to push sentiment to new lows in the months ahead. The survey was conducted between March 30th and April 5th, suggesting the recent upswing in stock prices also helped to improve sentiment. The MSCI World Stock Index added close to 25% since early March but technical positioning suggests the move is a correction in the context of larger downtrend.

The latest edition of Japan’s Eco Watchers Survey revealed merchant sentiment improved for the third consecutive month in March: respondents’ assessment of current conditions rose to 28.4 from 19.4 in the previous month while the reading measuring future expectations rose to the highest in 11 months. Still, the metric remains below the 50 “boom-bust” level, suggesting demand for taxis, restaurants, and other consumer services continues to contract albeit at a slower pace.

Euro Session: What to Expect



Germany’s Current Account is expected to improve a bit in February, showing a 5.8 billion euro surplus following a 4.2 billion result in the preceding month. Because of the volatility in monthly trade figures, the annualized picture is far more telling. From this perspective, a print in line with expectations would amount to a whopping -64.2% decline in trading terms in the year from February 2008. Indeed, December’s drop-off convincingly snapped a multi-year uptrend dating back June 2001. Meanwhile, the most recent release of the analogous metric for the United States saw the deficit shrink to the smallest in 5 years. On balance, this calls for downward pressure on the EURUSD exchange rate in the long-term outlook, implying a net outflow of money out of the Euro Zone’s biggest economy and into the States.

Risk trends are likely to dominate price action in overnight trading. Stocks slid on Wall St and continued lower in Asian hours as investors began to fret about the impact of deepening global recession on the upcoming round of earnings reports. Dow Jones and S&P index futures are down a hefty -1.2% ahead of the opening bell in Europe, arguing for continued US Dollar strength ahead.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar to Extend Gains Against Euro, British Pound as Risky Assets Falter (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

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.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

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!