5.04.2009

The Greenback is Trending Lower on Global Recovery

The U.S. dollar approached a 3 week low against the EUR as better economic data worldwide saw investors grow increasingly confident that the worst in the global economy may be past, boosting risk appetite. The Dollar resent losses however, may be tempered before the Federal Reserve and U.S. banking regulators reveal the results from stress tests on the nation's 19 biggest banks this week. The results of the U.S. banks' stress tests may pose downside risks for the markets, and as such, the dollar may garner support as a safe- haven currency.



USD - Bank Stress Test may Suppress USD

A deeper look into forex market activity since Friday indicates two primary forces driving the USD in today's early trading hours. The first is news that the recent bank stress test results will be published later this week, the second is the continuation of the swine flu epidemic of fear that has apparently gripped the attention of many investors. Losing ground against most of the major currency counterparts, the USD could potentially dig itself deeper in the hole in the coming weeks.

After the market opened for today's early trading session, the USD apparently dropped towards 1.3330 against the EUR and as low as 1.4960 against the Pound Sterling, breaking last week's low against that pair. As many analysts are anticipating results from the bank stress test to show that the USD is not as safe an investment as many think, traders could see a sudden flight from the greenback in the coming weeks as banks attempt to determine its true value. Just how low will the Dollar drop in such a situation?

Considering that much of the economic data being released from the United States has been relatively positive, it seems strange that an out-flux from the USD will occur, but if market forecasters foresee doom in the Dollar's future, the predictions of a 1.4500 mark against the EUR and 1.5100 mark against the Pound, may very well be reached in the weeks ahead. Other data, if it continues to show positive results, may also signal a flight from the forex market in exchange for the higher yielding assets of the stock markets, thus resulting in further depreciation in common safe-havens such as the greenback.

EUR - EUR Benefits from Recent Market Fears

The EUR may well have been last week's victor in the forex market, making solid gains against all of its currency rivals. The EUR started this week up against the USD near the 1.3330 price level, and started climbing back towards 0.8950 against the GBP in today's early trading hours.

As fear of the international swine flu outbreak proceeds, investors are finding ways out of their typical safe-haven assets as they appear to be the primary targets of investment flight. Also, with the US releasing information about its recent bank stress test this Thursday, market analysts are predicting a heavy downfall for the US Dollar, the typical safe-haven of choice for many investors. As Euro-Zone economic data has shown lately, its economy may be on a more solid track to recovery than many had anticipated. This unexpected result has made the EUR the primary beneficiary of safe-haven flight. Many expect this to continue through this week as well.

One of the main beneficiaries for the 16-nation currency this week is the fact that it has a very low news week ahead, and most news emerging from the Euro-Zone's primary contender - the United States - is forecast to show negative results. Typically a low news week damages a currency as other markets take the wheel, but a dead news week in light of the US's bank stress test may very well prove positive for the EUR. Traders may want to look to an appreciating EUR over the coming week; a price level near 1.3600 against the greenback may not be wholly unrealistic.

JPY - Yen's Fate may be Tied to USD; Bad News Ahead?

The Japanese Yen has taken a heavy toll against all of its currency rivals over the previous few trading days. The market shows the Yen near the 100.00 mark against the USD and the 132.60 mark against the EUR, an ominous signal for the island currency. As Japan's economy continues to shrink, and as investors flee from traditional safe-havens in light of the outbreak of swine flu internationally, the JPY may be taking the worst beating of all. Many wonder how long this negative turn can last for Japan's currency.

With the US set to release data on its recent bank stress test the bad news for the Dollar which many expect may take some of the downward pressure off of the Japanese Yen, but even this is doubtful. With hardly any economic news coming out this week, the JPY may be tied to the fate of the US Dollar. If the greenback indeed depreciates in the days ahead this could signal a tidal shift away from common safe-havens and a reinvestment into less traditional banking systems, such as those in Europe recently. Whatever the outcome, many traders appear ready to sell the JPY this week.

OIL - Crude Price Goes Up as USD Comes Down

As last week's trading session came to an end, the price of Crude Oil appeared to make a rather abnormal upward turn. Starting near $50.50, the price rose just above $53.00 during the last remaining trading hours on Friday. As today's trading session began, the price of oil appeared to remain in place above the $53 mark. What may have caused such a movement?

Glancing over the fundamentals doesn't appear to provide a clear-cut indication for this upward movement. However, there does appear to be one trend which may have pushed the price of oil higher: the USD's depreciation. Crude Oil is sold in US Dollars, which means the two are negatively correlated. As the USD depreciated from numerous factors, such as the swine flu outbreak and increase in risk appetite, the price of Crude Oil likewise moved positive. However, the price has yet to breach any real significant barriers. If Crude Oil's price moves beyond the $54 mark in this week's trading, investors may look to buy this commodity as it discovers its new price level. Also, if the USD does go weaker in the days ahead, traders should look to buy Crude Oil as a relatively safe investment.

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US Dollar Lower As Asian Stocks Rise on Chinese Manufacturing Growth (Euro Open)

The US Dollar extended losses as stocks pushed higher overnight after China’s manufacturing sector expanded for the second consecutive month in April, fueling speculation that a rebound for the East Asian will help stabilize global economic growth. German Retail Sales headline the calendar in European hours.

Key Overnight Developments

• Australian House Prices See Record Drop in First Quarter
• US Dollar Lower as Chinese PMI Boosts Asian Stock Exchanges

Critical Levels



The Euro traded higher in the overnight session, punching through the 1.33 level to add as much as 0.6% against the US Dollar. The British Pound followed suit, adding as much as 0.4% against the greenback.

Asia Session Highlights



Risk trends dominated forex price action in overnight trading, with the US Dollar extending losses as stocks pushed higher across Asian exchanges. The MSCI Asia Pacific Index surged over 3% as China’s Purchasing Managers Index rose to 53.5 in April from 52.4 in the preceding month, showing manufacturing expanded for the second consecutive month (a reading above 50 suggests the sector is growing) and fueling expectations that a rebound for the Asian giant will see positive spillover elsewhere and bolster the global economic recovery. China announced in March that it would spend close to 4 trillion yuan to boost the economy, targeting infrastructure, industrial modernization, and rural development. Meanwhile, a meeting of the Association of Southeast Asian Nations together with Japan, China and South Korea agreed to set up a $120-billion foreign-currency reserve pool at a meeting in Bali over the weekend.

In Australia, the House Price Index tumbled -6.7% in the year to the first quarter, the largest drop on record and the biggest in at least 6 years. Together with recent disappointments in new home sales and vehicle sales, this data reflects Australian consumers’ continued hesitation to commit to big-ticket purchases. This seems logical considering the deepening economic downturn has pushed the unemployment rate to a 5-year high of 5.7%, weighing on disposable incomes, while access to borrowing has dwindled to unprecedented levels. Private consumption is the largest component of overall economic growth, so naturally the fallout in spending has substantially contributed to what is increasingly expected to be first Australian recession since 1991. Indeed, TD Securities reported that deepening economic turmoil pushed the annual pace of inflation to 2.1% in the year to April, the slowest in four years.

Euro Session: What to Expect



German Retail Sales are expected to add 0.2% in March, suggesting receipts shrank at an annual pace of -0.3%, an improvement from the previous month’s -5.3% decline. The improvement likely comes as the government’s 82 billion euro stimulus package works its way through the economy. On balance, the data is unlikely to reveal trends supportive of a sustained return to Euro strength. The world’s fourth-largest economy could afford a far greater fiscal effort considering the kind of spending being done by its major counterparts, most notably the US. This coupled with a deliberately slow-moving ECB suggests private demand will likely be comparatively slower to pick up the baton after the government’s boost is exhausted, keeping unemployment at elevated levels and holding back spending. By extension, this is set to weigh on overall economic growth. Indeed, a survey of economists conducted by Bloomberg suggests German GDP growth will underperform that of the US by -2.45% and -1.45% in 2009 and 2010, respectively (those figures for the overall Euro Zone are -0.8% and -1.35%). Broadly speaking, this means US interest rates will rise faster than those in Europe, arguing for EURUSD downside in the months to come.

Separately, the Euro Zone Sentix Investor Confidence reading is seen pushing higher to -28.0 in May from -35.3 in the preceding month. The reading would break above the metric’s range near record lows that has held since December. Still, the print in negative territory continues to suggest that the bears continue to outnumber the bulls among the survey respondents polled for the release. Further, the uptick would still be firmly within the context of the clear long-term downtrend in place since June 2007.

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!