5.20.2009

Economic Growth Boosts Risk Appetite, Commodity Prices

These past several weeks have seen a series of positive economic data emerging from various economies. Even a record contraction in Japanese GDP was anticipated and the market impact was minimal. As market optimism takes hold, safe-haven assets such as the USD begin to weaken. Traders have witnessed recently as the greenback has lost strength to most other currencies, and commodity prices have begun to climb back to 2007-2008 price levels. Is the recession coming to an end?



USD - Dollar May Slide Further On Global Optimism

The U.S Dollar declined Tuesday against its major counterparts after a report from the U.S. Commerce Department said new construction of houses fell to a record low in April. The USD traded at $1.3630 per EUR after falling 0.5% yesterday. Against the Yen the U.S currency was at 95.94 after decreasing 0.3%. Analysts said that the data showing U.S. housing starts and permits unexpectedly fell to record lows doused the view that the housing market was stabilizing, denting optimism in the market for the U.S currency.

The USD also slid as a result of improving business sentiment in Germany, which spurred renewed optimism about the global economy, reducing demand for safer assets and boosting currencies perceived as riskier. Traders were also closely watching U.S. stock markets for indications about investors' appetite for riskier assets. Earlier, major indexes clawed into positive territory, pushing the dollar to the lows of the day.

The greenback may decline further versus the EUR as three U.S. financial firms' efforts to return government bailout money fueled speculation that banks have sufficient cash, reducing demand for Dollar-safety.

EUR - Pound Reaches 6-Month High vs. USD

The EUR rose on Tuesday, trading at $1.3625, up half a percent from Monday, due to a surprisingly big improvement in German economic sentiment. The ZEW indicator jumped to 31.1 in May from 13.0 in April, above economist estimates of a 20.0 reading. This suggests that analysts and investors were not as grim about the economy as before.

The British Pound also rose to the highest level this year against the Dollar after ICAP, the world's biggest broker of transactions between banks, posted increased profit, and Marks & Spencer Group Plc's net income beat analyst estimates, stoking optimism that the worst of the recession is over.

Analysts said the EUR-positive reaction to the ZEW report suggested that market participants saw improving sentiment in the Euro- Zone as boosting demand for risk, even as other data show that the economy remains weak. Gains in the EUR and Sterling helped to push the Dollar down as some traders unwind positions in the U.S currency. The USD is perceived to be a safe-haven option during times of uncertainty; however, the ongoing bets that the global economy is improving has warmed demand among investors for riskier trades in past weeks.

JPY - Japan's Economy Shrinks at Record Pace

The Yen fell for a 3rd day against the EUR as stocks gained after a government report showed Japan's economy shrank less than expected last quarter. The Yen fell to 131.17 per EUR from 130.81 yesterday in New York trading. The Japanese currency also declined against the Dollar to 95.70.

Japan's economy shrank an annualized 15.2% in the three months ending March 31st, following a 12.1% contraction the previous quarter. Japan's Gross Domestic Product (GDP) has also contracted by 4.0% in the first quarter of this year, marking its biggest quarterly fall on record. Economists have said that despite this very bad data, it was in line with the expectations and therefore neutral in terms of market impact.

Analysts have said that even though some market players were still unsure of the outlook for the Japanese economy, their expectations remain that this is the bottom for the economic recession and they may start to see a recovery from here onwards.

Crude Oil - Crude Hits $60 a Barrel

Crude Oil prices rose Tuesday, briefly topping $60 a barrel as analysts expected a drop in U.S. crude inventories, though gains were limited by disappointing U.S housing data. Oil's gains yesterday were aided by the Dollar's slump against the other major currencies, which bolstered demand for commodities as an alternative investment. Crude was up 62 cents, or 1.1%, at $59.65 a barrel yesterday. Previously it topped $60 overnight to reach $60.48, the highest level since the middle of November. However, Crude Oil reduced its gains after data showed U.S. April housing starts fell to a new low.

Oil prices have been on an upward trend since mid-April in equity led rallies. They have recovered from below $33 in December last year after a plunge from record highs above $147 in July. On Wednesday, market players will shift their focus to U.S. Crude Oil Inventories data. Analysts expect the data to show a decline in oil reserves by 1.3 million barrels. A reading above or below estimates can have a major influence on Crude Oil trading.

Article Source - Economic Growth Boosts Risk Appetite, Commodity Prices
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British Pound May Look Past Bank of England Minutes, Follow Risky Assets (Euro Open)

The British Pound may yield a muted response to the upcoming release of the minutes from the latest meeting of the Bank of England considering the markets have likely already priced in a very dovish bias after last week’s dismal quarterly inflation report. Rather, sterling may opt to fall in with risky assets yet again.

Key Overnight Developments

• Japan’s Economy Contracts at Record 15.2% Pace
• Australian Consumer Confidence Plummets

Critical Levels



Euro price action saw itself fall off horizontal resistance against the U.S. Dollar located at the 1.3662 level. Dollar pairs in general confined themselves to tight trading ranges with the British Pound moving virtually nowhere during Asia’s trading session.

Asia Session Highlights



Japan's economy in the first quarter contracted more than it did in the final three months of 2008, but still managed to perform stronger than economists had expected. The first three months of 2009 saw Japan's economy shrink 4.0%, worse than the negatively revised 3.8% contraction that the Asian country saw in the final period of the previous year. Expectations had called for the figure to actually perform weaker, that is that the economy would contract by 4.3% in this period. On an annualized basis the rate of output decline rose to a record pace of 15.2%. A Bloomberg survey showed that economists expected the annualized pace to be as optimistic as +2.0% and as bad as -19.8%.

Across the board, investments continued to dwindle. Capital investment alone fell 10.4% in this recent period as opposed to a decline of only 6.7% and 4.4% in the final two quarters of 2008. Investments in new residential home development fell 5.4% after actually rising in the final 6 months of the previous year. Overly-optimistic investments in these residential properties may bode negatively for those who participated. As a result of the contracting economy, those who tied their money into such ventures may now be seeing a residential community averse to purchases of new homes. Unless these development projects primarily resided in apartment ones, these investments could continue to bring the economy southward as lost money fails to be transferred to productive capital needs. But because Housing Loans have been steadily increasing since December, property developers may actually benefit from this contracting economy, which has brought about very low interest rates.

Australian Consumer Confidence fell in May after having risen in April for the first time since December, according to Westpac Bank. May saw consumer sentiment fall 4.3% after surging ahead 8.3% during a month in which the Australian stock market recouped its losses for 2009. April's figure comes on the back of stock selling and rising energy prices. Wages paid to Australian laborers rose in line with expectations, albeit at a slower rate than during the final three months of 2008. The move came during a time when unemployment rose, allowing employees to use the weak labor market as a bargaining tool.

Euro Session: What to Expect



German Producer Prices are expected to have contracted -1.3% in the year to April, the most in nearly 7 years. Falling wholesale inflation foreshadows continued downward pressure on consumer prices as lower manufacturing costs are passed on via cheaper finished products. The annualized inflation rate fell to the lowest level in a decade in March and although prices rebounded a bit on Easter-linked spending and currency depreciation in April, the risks surely remain to the downside as deepening recession compounds lower input costs. Indeed, the danger going forward is that continued weakness in economic growth both at home and abroad will encourage expectations of deflation, a scenario that would substantially compound the downturn by encouraging consumers and businesses to perpetually hold off on spending and investment to wait for the best possible bargain. For their part, the European Central Bank has continued to lag in offering aggressive monetary easing on par with their counterparts in the US, UK and Japan. Although ECB President Jean-Claude Trichet announced that the bank would move forward on quantitative easing with a scheme to “purchase euro-denominated covered bonds issued in the euro area,” details of the program (and thereby its actual commencement) have been delayed at least until the next policy meeting on June 4th. Such waffling may see the Euro punished as traders price in a longer path to recovery.

Minutes from the last meeting of the Bank of England are also on tap, with traders anxious to get a glimpse into the dynamics behind policymakers’ surprise decision to expand quantitative easing (QE) programs by 50 billion pounds. On balance, the impact of the release may prove to be on the muted side of things considering the markets have already had an opportunity to price in a very dovish BOE after last week’s quarterly inflation report revealed that the bank expects inflation to remain below the target 2% until 2012 as the economy takes a slow path to recovery from the current downturn. Indeed, yesterday’s weak CPI report failed to hold back the currency as risky assets advanced across financial markets. Still, selling pressure could emerge if it is perceived that the last QE boost was one in a series of expansions that will continue in the medium term.

Written by Ilya Spivak, Currency Analyst
Article Source - British Pound May Look Past Bank of England Minutes, Follow Risky Assets (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!