4.17.2009

Dollar Gains Momentum as the EUR Flatlines; JPY Rallies

After some surprising data regarding U.S. jobless claims yesterday, the USD saw moderate gains against its primary currency rivals. The European Central Bank (ECB) appears to be slow to recognize the required solutions to their economic woes, and Japan has regained a level of safe-haven investment as China's growth diminished through the first quarter of 2009. Safe-haven currencies appear to be gaining strength as the rest of the world's currencies continue to suffer from the recession.



USD - U.S. Dollar Rises on Positive Economic Data

The greenback rose against most other major currencies on Thursday due to speculation that the U.S. economy is starting to show some tentative signs of stability, thus boosting demand for the USD. Early U.S. economic data showed a decline in initial jobless claims, a plunge in U.S. housing starts and a slower rate of decline in manufacturing in the Philadelphia region.

In late afternoon trading, the Dollar was up 0.4% versus the EUR to $1.3170 after rising to a session high of $1.3128. The USD was also high against the Pound gaining 0.4% to $1.4917. The greenback, however, gave up nearly all of its earlier losses against the Japanese Yen. It was last down less than 0.1% at 99.28 Yen.

The Dollar has tended to gain ground during periods of economic uncertainty and financial turmoil, benefiting from falling equities as investors flee into other Dollar-denominated assets. The Dollar tends to rise on bad news because it is often seen as a safer place to park money during periods of market uncertainty and heightened risk aversion. In a sign that the world economy is still struggling, figures on Thursday showed China's annual economic growth slowed to its weakest rate on record in the first quarter, while Euro-Zone industrial output plummeted in February.

This weak economic data from around the world has reduced confidence that the global economy would recover anytime soon, therefore boosting safe-haven flows into the U.S. currency.

EUR - The EUR Loses Momentum

The European currency pared most of its losses against the Dollar. It was last down 0.3% at 1.3177 versus the USD. Against the Yen, the EUR traded at 130.95, after depreciating yesterday as much as 1.6% to 129.37. The currency may extend its decline against the Yen even further, after falling to the lowest level this month on speculation that policy disagreement among the region's central bankers will undermine efforts to end the recession.

Separate figures showed Euro-Zone industrial output plummeted by a record 18.4% year-on-year in February and inflation halved to an all-time low, reinforcing expectations that the 16-nation economy is deteriorating and that interest rates may fall more. The European Central Bank (ECB) is due to announce on May 7th whether it will follow counterparts in the U.S. and the U.K. in pumping money into the economy by purchasing assets. ECB policy-makers have already indicated they may support cutting the 1.25% target rate below 1% and purchasing debt securities to pump money into the ailing economy.

Analysts have said that the EUR is likely to remain bearish due to market distrust of the European economic outlook. The European currency will probably fall below the strong support level of 1.2900 later in the month.

JPY - Yen Gains On China's Disappointing GDP

The Yen jumped against the Dollar and other major currencies on Thursday after data showed China's economic growth slowed to its weakest on record, disappointing market players who had bought higher-yielding currencies in anticipation of more upbeat numbers.

China's annual GDP growth slowed to 6.1% in the first quarter from 6.8% in the final three months of last year, prompting market players to reverse positions and buy the Yen back. The Japanese currency jumped 0.3% against the USD to 99.15 Yen, and 2% against the GBP to 148.63 Yen.

The Japanese currency's biggest gains yesterday were versus the Australian and New Zealand dollars on speculation that the slowdown in China's economic expansion will deepen the world's recession. The JPY rose as much as 2.4% against the Aussie to 70.69 yen, and versus the New Zealand dollar, it appreciated 2.9% to 56.05 yen. These gains may continue through the rest of April.

Crude Oil - Crude Oil Gains on U.S. Jobs Data

Crude Oil prices rose above $50 a barrel on Thursday, after the United States, the world's largest energy consumer, witnessed the number of workers filing for unemployment benefits unexpectedly fall last week, but continuing claims rose to a record as the recession struck hard. However, its gains remained limited as mixed data from the United States and China reminded investors that any signs of economic recovery were tentative.

Crude Oil trading remained volatile during the session, as investors also digested separate sets of gloomy economic data from the U.S. and other countries. Cautious trading in U.S. stock markets also weighed on Crude Oil prices. News that the Organization of Petroleum Exporting Countries' (OPEC) seaborne oil exports, excluding Angola and Ecuador, will fall 560,000 barrels per day in the 4 weeks to May 2, was also supportive for prices recently.

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Euro Drops as ECB's Trichet Says He Supports "Strong Dollar" Policy (Euro Open)

The Euro tumbled against the US Dollar overnight after European Central Bank President Jean-Claude Trichet said that he supports the US’ “strong dollar” policy in a speech in Tokyo. The upcoming release of Euro Zone Trade Balance figures may amplify downward pressure the single currency, with trading terms set to drop a -6.7 billion euro in the year to February.

Key Overnight Developments

• New Zealand Annual Inflation Falls to 3% in First Quarter, as Expected
• Japan's Annual Service Demand Shrinks Most in 6 Months on Job Losses
• Euro Drops as ECB’s Trichet Says He Supports “Strong Dollar” Policy

Critical Levels



The Euro tumbled against the US Dollar in overnight trading, shedding as much as 0.9%. The British Pound followed suit, losing as much as -0.6% to the greenback. The Dollar advanced despite stock market gains across Asian exchanges as comments from ECB President Jean-Claude Trichet overwhelmed risk trends as the primary catalyst for price action (see below).

Asia Session Highlights



New Zealand’s Consumer Price Index fell to 3.0% as expected in the year to the first quarter. Deepening recession and lower global commodity prices are putting substantial downward pressure on price growth, a trend that is expected to bring annual inflation to 2% over the course of this year, a reading within the Reserve Bank of New Zealand‘s 1-3% target range. Lower CPI readings will give the central bank room for further interest rate cuts, with overnight index swaps pricing in a 25-50 basis point reduction when policymakers meet again in June. In their annual survey of New Zealand, the Organization for Economic Cooperation and Development (OECD) forecast the downturn will continue through 2009 and said the central bank has room to take benchmark rates as low as 2% in the months to come.

In Japan, the Tertiary Industry Index revealed that service demand shrank -0.8% in February from the previous month. The metric slipped -6.1% in annual terms, the most in at least 6 months. Dwindling overseas sales have pushed firms to scale back capacity, boosting unemployment and weighing on consumer spending, including that on services, and keeping downward pressure on economic growth. Earlier this week, the government unveiled a new stimulus plan worth 15 trillion yen ($154 billion) to boost the world’s second-largest market amid the worst downturn since the Second World War.

European Central Bank President Jean-Claude Trichet was typically cryptic in his speech in Tokyo: The ECB chief said central banks must do “all they can” to restore confidence but in the same breath said that this requires a “measured approach”. The ECB has been under the gun recently for being too timid in offering monetary stimulus as the Euro Zone sinks deeper into recession. Most significantly, Trichet said he supports the US’ “strong dollar policy”, sending the single currency tumbling 53 pips within 2 minutes to test as low as 1.3068. He further added that “any ambiguity in our medium-term policy direction would delay the return of sustainable prosperity,” signaling that the bank’s decision-making body will finalize their stance on using “unconventional measures” to ease lending conditions as promised when policy is announced in May.

Euro Session: What to Expect




Switzerland’s Retail Sales are expected to shrink -0.2% in the year to February, the first print in negative territory since November of last year. Sales were supported through the last two months as inflation came to a near-standstill, boosting Swiss consumers’ purchasing power and improving sentiment. Looking ahead however, the underlying fundamental environment is hardly supportive of continued strength. Unemployment has risen to 3.4%, the highest in close to 3 years, and will weigh on disposable incomes as well as prompt precautionary saving. Further, the fallout in price growth will begin to work against spending if deflation expectations become entrenched, encouraging consumers to perpetually put off purchases to wait for the best possible bargain. Consumer prices, the headline inflation gauge, turned negative for the first time in 5 years in March, shrinking at an annual pace of -0.4%.

Turning to the Euro Zone, the Trade Balance deficit is forecast to print at -5.0 billion euro in February, a narrower shortfall than the -10.5 billion result registered in the previous month. Setting aside month-to-month volatility, the expected result would amount to a -6.7 billion euro annual drop in trading terms as compared to a 0.6 billion improvement in the year to January. Meanwhile, the analogous metric in the US has been trending sharply higher, seeing the trade gap narrow by a hefty 58% in the year to February. A widening deficit in the Euro area coupled with a contracting one across the Atlantic implies a net outflow of capital from the currency bloc and into the States, extending our medium-term expectations of EURUSD downside into the long-term outlook.

Written by Ilya Spivak, Currency Analyst
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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!