5.05.2009

Increased Optimism sets the Tone for Trading

For the year thus far, the S&P 500 index is in positive territory. With this news the price of Crude Oil has also risen to its yearly high. However, the added buoyancy is hurting the Dollar as traders are taking on greater risk with higher yielding currencies and swapping out their safe-haven investments.



USD - Rising Stocks and Housing Data Hurt the Dollar

The Dollar continued its upward correction as a rise in stock markets and better than anticipated economic data fueled further risk-taking in the forex market. The EUR/USD was under pressure during trading hours in Japan and Europe, falling throughout the day. However, the pair failed to break a key support line at 1.3200 and reversed course. Driving this appreciation of the pair were gains in equity markets. The Dow Jones Industrial Average finished the day up 2.61%. Adding further to risk appetite in the market was the release of better U.S. Pending Home Sales data. The release came in surprisingly high, contributing to the sell-off of the Dollar.

Prices could have been exaggerated earlier in the day as liquidity was light due to Japanese markets being closed for "Golden Week". We may expect further weakness in the Dollar's crosses as expectations abound to the easing of the global economic recession. This may be seen extensively against currencies linked to commodity prices such as the Aussie Dollar (AUD) and New Zealand Dollar (NZD).

Two major events are on tap for today's trading. The Institute for Supply Management (ISM) will release its Non-Manufacturing PMI report. This indicator is a key gauge of economic activity and expansion. The reading is expected to show moderate improvement from the previous month's release. A second event will be testimony from Federal Reserve Chairman Ben Bernanke on the economic outlook before the Joint Economic Committee of Congress. His comments may hint at an improving economic environment, which may in turn hurt the Dollar. We could see the EUR/USD test the 1.3600 resistance line today.

EUR - EUR Continues Bullish Correction

The EUR has risen the past 3 trading sessions against the Dollar. Yesterday was no different as European investors had reason to cheer as positive momentum was given by the Purchasing Manager's Index reading. This release, along with gains in stock markets helped to boost the EUR against the major currency pairs. The EUR finished at $1.3376 from $1.3315. The EUR/JPY was higher at 132.10 from 131.35. Also the EUR/GBP finished stronger at 0.8945 from 0.8890.

The 16-nation currency has reason to be satisfied in recent days considering the sudden surge in foreign investment, largely due to uncertainty across the safe-haven spectrum. As traders look elsewhere for riskier investments, the Euro-Zone apparently ranks high on the list, and the EUR and GBP appear to be reaping the rewards.

We may see higher-than-average volatility for EUR pairs as traders position themselves over the next few days for the European Central Bank's (ECB) Interest Rate decision. The market will be looking for not only a 25 point basis rate cut, but also for a quantitative easing program. This would be enacted similar to the program undertaken by the U.S. Federal Reserve to purchase long-term government securities. A failure by the ECB to enact such a program could send the EUR sharply lower against the Dollar.

JPY - Yen Hits 3-Week Low vs. EUR

The Yen has reached a 3-week low against the EUR amid speculation the global recession is easing. The upcoming release of U.S. stress tests is also a negative for the Yen. This has traders dumping the Japanese Yen in favor of riskier, higher yielding currencies. Against the Dollar, the Yen has reversed a bit from its bullish run of the past week. Yesterday the USD/JPY finished the day at 98.80 from 99.45.

Trading during the Japanese session could have higher volatility due to the holiday which concludes Thursday. This time period could have prices pushed further than expected, and the Yen driven by events occurring outside the Japanese economy. Two key events that traders will need to be mindful of for the Yen will be release of U.S. bank stress test results on Thursday and U.S. Non-Payrolls on Friday.

Crude Oil - Crude Hits Yearly High

The price of Crude Oil hit its yearly high during yesterday's trading as gains in equity markets and heightened optimism helped rally the commodity's price. An improvement in the global economy will help to boost the demand for energy consumption, adding to the price of Crude Oil. The S&P 500 finished the day in positive territory for the current year, and the weakness of the Dollar has helped to support Crude prices. The price of Crude Oil closed yesterday at $54.00 from $53.20.

Further consensus that the economy is set for a rebound may continue to support the price of Crude Oil. During today's trading we could see a slight pullback below the $54 mark as traders may be inclined to book profits. However, tomorrow's Crude Oil Inventories report could send the price back above this level, perhaps breaking the $55 resistance line.

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Australia Holds Interest Rates Unchanged at 3% as Expected (Euro Open)

The Reserve Bank of Australia kept interest rates unchanged at 3%, as expected. Notably, RBA chief Glenn Stevens introduced new language into the statement accompanying the announcement, tempering a generally upbeat outlook by leaving the door open to cut rates again later this year.

Key Overnight Developments

• Prices for New Zealand’s Commodity Exports Rose for Second Month in April
• RBA Leaves Rates Unchanged at 3% But Leaves Room for Future Reductions

Critical Levels



The Euro traded lower overnight, correcting to test as low 1.3364 after a steep rally in New York hours. The British Pound followed a similar dynamic, reversing back to the 1.50 level after trying as high as 1.5052 early in the session.

Asia Session Highlights



The ANZ Commodity Price Index showed the cost of New Zealand’s top exports on global markets rose for the second consecutive month in April, adding 2.5% after a 1.0% in the previous month. Measured in the local currency, however, prices fell to the lowest level in nearly 2 years. This suggests the New Zealand’s Dollar’s recent gains may steer overseas buyers away from the smaller antipodean nation’s products, reversing some of the recent improvements in the Trade Balance.

The Reserve Bank of Australia left benchmark interest rates at 3.00%, as expected. RBA Governor Glenn Stevens said that noted “signs of stabilization” in the global growth, singling positive developments in the Chinese economy in particular, and added that financial markets are “on a path of gradual improvement.” Stevens expects inflation to continue to abate as the Australian economic performance likely to decline further over the rest of the year. That said, the central bank chief again asserted that “monetary policy has been eased significantly [and this] together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.” Perhaps most significantly, Stevens included language absent from the previous announcement saying that the bank will monitor global and financial conditions in assessing the need for “further reductions”. Westpac Banking Corp’s chief economist Bill Evans has speculated that the decision to delay lowering rates now is likely tactical saying, “We expect the bank will see the need to have ample capacity to be cutting rates through the second half of 2009…The economic case for cutting rates is undeniable.” The Australian Dollar advanced 30 pips in the 20 minutes immediately following the announcement, reclaiming the 0.74 level.

Euro Session: What to Expect



The Euro Zone Producer Price Index is expected to have declined for the eighth consecutive month in March, showing wholesale inflation fell at an annual pace of -2.9%, the most in over 22 years. The release implies forthcoming downward pressure on consumer prices (the headline inflation gauge) as lower production costs are passed on via cheaper finished goods. Indeed, a survey of economists conducted by Bloomberg suggests CPI growth will come to a standstill by the end of June. Overnight index swaps suggest the market is pricing in an 88% probability that the European Central Bank will cut interest rates to a record-low 1% when policy is announced later this week.

In Switzerland, the SECO Consumer Climate indicator is expected to reverse lower in April to print at -25, down from -23 registered in January when sentiment rebounded as tumbling inflation boosted Swiss consumers’ purchasing power. The unemployment rate has risen to a 3-year high at 3.4% and is expected to surpass 4% by the end of the year, weighing on disposable incomes and suggesting consumer sentiment will continue to suffer in the months to come.

Written by Ilya Spivak, Currency Analyst
Article Source - Australia Holds Interest Rates Unchanged at 3% as Expected (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!