USD - GDP Report on Tap - Will USD Weakness Continue?
The U.S. Dollar traded weakly in yesterday's session as it witnessed depreciation against all of its currency rivals. Plunging toward the critical levels of 1.4000 against the EUR and 1.6000 against the GBP, the greenback's recent weakness doesn't appear to have an end in sight for today.
With an expectant worry that today's data releases will put investor focus on America's increase in debt issuance, thus resulting in a higher Treasury yield; the market may continue to go bearish on the USD. As expected, higher yielding assets and currencies like the EUR and GBP may then gain significantly from these speculations. Positive economic data in Europe throughout the week has also resulted in dramatic investment shifts towards a diversified portfolio for many traders who wish to increase their risk and pull away from safe-haven investments.
Looking forward to today, forex traders will no doubt be marking the multitude of European data releases as Britain's HPI housing report may show a sudden return to market weakness, and the Euro-Zone's M3 money supply report has the potential of showing a drop in the level of currency available throughout the European forex market. In the United States, the Preliminary GDP report is scheduled to be released at 12:30 GMT and may show the U.S. economy shrinking less than last quarter, a sign that the economy could be entering a solid recovery. With a focus on America's debt issuance, USD weakness is anticipated to continue throughout the end of the week.
EUR - EUR's Recent Gains on Unsteady Ground
The EUR has been the beneficiary of the market's recent increase in risk appetite considering it has appreciated against almost all of its currency rivals over the past week. The 16-nation currency climbed towards the psychological barrier of 1.4000 against the USD, temporarily breaching the resistance line before falling back under the mark. With the recent dash to sell off the JPY, the EUR apparently received the bulk of investor flight, climbing as high as 135.40 against the island currency.
With the surge of consumer confidence in some of Europe's largest economies, there exists a moderate level of hope in a speedy recovery for the Euro-Zone's regional economy. German market data has displayed a wide array of positive results which have helped convince many weary traders that the worst may indeed be over. In a rush to diversify trading portfolios for riskier assets, the EUR appears to have been one of the primary choices for this move. The question remains, however, as to whether this move towards Europe will continue. Some analysts say it marks the beginning of a recovery, but will not sustain itself at this pace in the short-term.
As for today, there are two important data releases which forex traders need to keep an eye on. The first is the Nationwide HPI report in Britain which may show the housing market declining once more. This report is scheduled to be released at 6:00 GMT. The second is the report on the M3 money supply in circulation throughout the Euro-Zone. With a direct correlation to interest rates, the money supply is an important gauge of currency valuation. With negative results, we could see a temporary reversal to the EUR's recent trends through the end of today's trading.
JPY - JPY-Funded Carry Trades Returning?
The Japanese Yen saw one of its most bearish sessions in months. Dropping back towards the 97.00 level against the USD, and the 155.00 level against the GBP, the island currency witnessed a rash sell-off in Thursday's mid-day trading sessions. There was a growing concern that Japanese equities were more resilient than previously forecast which led to an increase in risk appetite for many safe-haven investors. This generated an investment flight towards Europe in search of higher yielding assets. Some analysts believe the JPY-funded carry trade may be on the return, which will eventually push the value of the Yen towards the lows of 2007-2008.
As for today, there aren't many data releases expected from Japan. However, last night's consumer pricing reports indicated a decrease in price for Japanese goods and services, highlighting a weakened demand for these sectors of Japan's economy. This may also have generated a strengthened push to flee from JPY safe-haven investments. Unless news from the Euro-Zone or U.S. comes out highly negative throughout the day, the JPY will likely continue getting weaker.
Crude Oil - Crude Oil Price Meets Little Resistance
After climbing to a record high not seen since November, the price of Crude Oil has stabilized for the moment. With a sudden flight from safe-haven investments such as the JPY and USD, commodity prices appeared to gain a strong boost from the weakness of the Dollar. Crude Oil spiked to the price of $65 a barrel in mid-day trading yesterday. Only in today's early trading hours did the price begin to settle just under this price barrier.
The Organization of Petroleum Exporting Countries (OPEC) agreed not to change production levels for the time being, with the assumption that doing so may destabilize weakened economies. A report showing a sharp decline in oil inventories also supported this move as a boost to demand and consumption is expected in the coming weeks. With this information in mind, forex traders may understand that long-term pressure continues to show upward momentum, meaning the price of oil may continue on up towards $75 a barrel in the coming months.
Article Source - U.S Prelim GDP Figure will Determine Today's Trend
Key Overnight Developments
• Japanese Unemployment Hits 5.5 Year High
• Japan’s Industrial Production Jumps By Most in Six Years
Euro price action traded to pivot resistance before heading back down, but failed to break the 1.39 mark. Sterling confined itself to the upper 1.59 mark, showing topping-out characteristics that could see the Dollar move ahead at the start of next week’s trading.
Asia Session Highlights
The price of Japanese Consumer Goods fell for a third straight month in April, by 0.1%, which was better than economists had forecast. March also saw the figure fell by 0.1%. Retail Sales may have contributed to the fact that the CPI number did not accelerate in a negative direction. In fact, data for April showed that consumer increased their appetite by 0.6% after having plummeted 1.1% in the month prior. This upward pressure on prices might not hold steady in future months if the island economy continues to dwindle.
Japan's Jobless Rate rose by to the highest level since late-2003, by 0.2 percentage points to 5.0% in April. In line with expectations, the figure rose as the economy continued to drag the labor market down. The much watched jobs-applicant ratio tanked to a 10-year low of 0.46 from 0.52. In a sign that workers might be turning a bit optimistic, the number of new applicants as a percentage of the total work force rose a tick to 0.77%. This coincides with the nation's consumer confidence number, which rose to 33.2 in April, from 29.6 in the month prior.
Japan's Industrial Production in April soared by the most in at least six years, when the data first began being compiled. Indeed, the key metric, rose 5.2% in the month after economists had forecast it to rise by only 3.3%. The 12 months through the end of this period saw such production fall 31.2%.
Australia’s Private Sector Credit, the amount that banks loan to business and consumers, rose by 0.1% in April from the month prior. The steady increase may be as a result of a monetary policy reluctant to continue a rate-cutting campaign.
Euro Session: What to Expect
Euro-Zone Consumer Prices are expected to to have risen only 0.2% in the year through the end of May. If Germany, the zone’s largest economy, is of any indication, CPI data might actually come in lower than the surveyed figure. Germany’s inflation rate underscored estimates by 0.2 percentage points and may see its own data heavily weigh on the broader Euro-Zone’s published number. Just yesterday we saw that the Unemployment Change number came in significantly under that which was surveyed. At only 1,000 new jobs created, as opposed to the expected 64,000, the upward pressure that would normally be felt on the price of goods might not actually be completely there. Indeed, as more people are unemployed, the less cash there exists to be spent on various items included in the CPI basket.
Such developments may also lead German Retail Sales to come in largely under that which is expected. The overly optimistic 0.5% expected number might actually continue to be a negative one. But as a recent revision have shown, March’s spending data was actually not as bad as what the government had originally reported.
The Swiss KOF Leading Indicator will likely continue to be in the negative region, but may show signs of relief by reducing the rate of deterioration if not actually showing an upward tick. With the number of exports surging ahead by 8.3% in April alone, and the unemployment level rising in line with expectations by only a 0.1 percentage point we may see the Swiss economy somewhat stabilize.
Written by Luis Gil, DailyFX Research
Article Source - Deflation, Not Inflation, Might Dominate Headlines Tomorrow (Euro Open)
• US and New Zealand Credit Ratings Shirk Dour Forecasts
• A Round of Rate Decisions and Growth Reports Gauge Risk/Reward
Risk appetite across the markets has maintained the bullish trajectory cultivated since the beginning of March; but momentum has clearly drained over the past few weeks. The hesitation develops as market participants debate the merits of forecasting a genuine market recovery on the basis of what is so far early signs of a moderating recession and the promise such tentative progress holds for bolstering yields. This wavering is a sign that skepticism is on the rise with traders having already spent much of the fuel a speculative rebound could afford the market after a lengthy period of caution and deleveraging. However, looking at the Carry Trade Index, it is clear that this congestion will come to a breaking point soon. Looking beyond the congestion of the past month, there is still a steady bullish bias behind risk appetite since February. The same can be seen in the benchmarks for the various markets: the S&P 500 has advanced eight out of the past 10 weeks; the benchmark 10-year Treasury note is off nearly 9 percent from its record highs set in December; and AUDJPY has climbed 12 of the past 16 weeks to a current perch of 33.5 percent off its recent record lows. Clearly, the momentum of these past few months would support a continued rise in sentiment. However, putting this advance into perspective, the Carry index is still more than 26 percent off its 2006 highs and equities are more than 40 percent from their respective record highs.
When will the struggle between speculation and fundamentals balance out; and what will happen when the market shifts back to this equilibrium? As the market’s appetite for risk rises, we have to consider what can fuel the advance through the coming days, weeks and months on to a genuine recovery – if this is indeed a genuine recovery. Here we see objective fundamentals are still sketchy in their support for a rise in optimism. Taking the basic ‘risk-versus-reward’ analysis approach, there is reason to be concerned over further financial troubles later down the line and certainly grounds to doubt a rise in returns beyond what volatile speculative gains can achieve. Separating capital returns and yield income is essential. Capital gains can be driven by normal market forces like a rebound from oversold conditions and temporary momentum to sustain a rally as investors return to the market. This could essentially be the foundation for the progress we have seen the markets make over the past three to four months. However, to turn a reversal into a recovery, there needs to be the hope of higher yield income to attractive deeper pools of money to the more established carry trade interests. Next week’s RBA, ECB, BoE and BoC rate decisions will help on this front. Should they all hold as expected and note improvements seen in the distance, we will be one step closer to a return to carry. In the meantime, safety is still the greater unknown. While the US and New Zealand debt ratings were recently secured, we still have not seen a clear turn in global recession readings.
Written by John Kicklighter, Currency Strategist
Article Source - Market Sentiment and Carry Interest Will Have To Find Its Bearings Soon
What is Forex?
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.
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Good luck to everyone!