USD - USD Gains on Return to Risk Aversion
The U.S. Dollar gained against its riskier counterparts Monday after the World Bank issued a poor forecast for 2009. Renewed concerns over the state of the global economic recovery combined with unfolding instability in Iran and North Korea brought back an air of pessimism pushing investors to safer currencies. The Dollar was at $1.3856 per EUR following a 0.5% gain since Friday and at 95.99 Yen down from 96.23.
The World Bank predicted Monday that the global economy will shrink 2.9% in 2009, much deeper than the previous estimate of 1.7%. Doubts were also raised that developing countries will be able to spur global economic recovery as their GDP is expected to grow only 1.2% in 2009. The prospect for world economic recovery is expected to be slow and shallow. The report led to a decline in equity markets and commodities which further helped strengthen the Dollar.
The biggest risk to the Dollar this week is the highly anticipated Federal Open Market Committee (FOMC) meeting that is set to begin today and concludes Wednesday with a policy statement. Existing Home Sales are set to be released at 2:00 GMT; however, most of the focus will still be on the outcome of the FOMC meeting as investors await announcements regarding the Fed's Treasury buying program and direction of interest rates.
EUR - EUR Loses against Most Currency Pairs
The EUR lost against its major currency pairs Monday as investors returned to risk aversion after a disappointing report from the World Bank. The EUR traded at $1.3856 Monday down from $1.3948 and at 133.05 Yen down from 134.22 Friday.
Additional pressure to the EUR came after European Central Bank (ECB) President Jean-Claude Trichet stated that he has no intention of offering stimuli to the Euro-Zone economy. A slightly stronger than expected rise in the German Ifo Business Climate had a very short and mild effect on the EUR considering Germany's budget deficit shortfalls made this boost in optimism appear muted.
Despite some interesting economic data set to be released today, including the German Flash Manufacturing PMI and the German Flash Services PMI, both to be released at 7:30 GMT, the markets are awaiting the FOMC meeting statement and ECB's one-year refinancing operation, both due on Wednesday.
JPY - Political Turmoil Benefits JPY
The Japanese Yen gained against most major currencies Monday as risk aversion returned amid political unrest in Iran and a gloomy report from the World Bank regarding expected global recovery. The report stated that the recession will be deeper than previously forecasted, pushing investors to safer currencies, such as the Dollar and Yen.
The Yen traded at 132.87 per EUR following a 0.9% increase yesterday and was at 95.86 per Dollar, after rising 0.4%. Economic data released earlier showed an improvement in the business sentiment index as well as an improvement in the services sector, providing a brighter outlook for Japan's economic state. As the world turmoil continues, it is likely the Yen will extend its gains during today's session as well.
Crude Oil - Crude Oil Drops below $67 a Barrel
The price of Crude Oil dropped more than $2 a barrel yesterday after the World Bank estimated the world economy will contract 2.9% in 2009. A rebounding Dollar also put pressure on Oil as investors moved away from riskier assets and into safe-haven currencies.
Declining expectations of a recovery in U.S summer gasoline demand along with reports of sharp increases in inventories snapped Crude's recent rally. Gasoline demand usually peaks during the summer in the U.S, but in light of the continuing recession and growing unemployment there are less commuters and fewer vacation plans. Furthermore, since refiners are operating at roughly 86% of capacity, even with a sharp increase in demand, gasoline supplies are unlikely to tighten further. There is expectation that the U.S. gasoline inventories will keep rising.
Although some correction is expected, investors are awaiting the release of the U.S Crude Oil Inventories on Wednesday at 14:30 GMT and the FOMC statement to be released 18:15 GMT.
Article Source - World Bank Forecast Returns Traders to Safe-Havens
Key Overnight Developments
• Japanese Yen Gains as Stocks Tumble Across Asian Exchanges
• US Dollar Looks Past Risky Assets, Consolidates in Overnight Trading
The Euro kept to familiar levels in overnight trading, oscillating above the US session low at 1.3826. The British Pound slipped lower, trading down -0.2% ahead of the European markets’ open.
Asia Session Highlights
The Japanese Yen added a full percentage point in overnight trading against a trade-weighted basket of top currencies, boosted by safety demand as Asian stock exchanges followed Wall St sharply lower. The MSCI Asia Pacific Index traded down -2.8% ahead of the opening bell in Europe on continued fallout from yesterday’s discouraging World Bank global economic growth forecast. The US Dollar, also a currency that has been inversely linked to risky assets in recent months, failed to capitalize this time around and consolidated in a narrow range after adding 0.7% higher on the week by the end of New York trading. Still, the Dollar Index remains -92.3% inversely correlated to the MSCI World Stock Index suggesting the greenback stands to gain if risky continue to falter.
Euro Session: What to Expect
Switzerland’s Trade Balance surplus may widen in May after swelling to 2.55 billion francs in the previous month as prices for imported goods fell at the fastest pace in over 18 years and the currency appreciated. The import price index fell at an annual pace of -8.9% in May, deflating inbound shipment volume readings. Meanwhile, the Swiss Franc added 0.9% against a trade-weighted basket of top currencies in the same period, making the mountain nation’s goods comparatively more expensive for foreign buyers and pushing export volume readings higher. Overall, a survey of economists conducted by Bloomberg suggests the external balance will add just 5.75% to GDP this year, the smallest contribution in at least 12 years, as deep recessions grip the mountain nation’s main export markets and weigh on cross-border sales.
The advanced estimate of the Euro Zone’s Composite Purchasing Manager Index is expected to show the metric rose to 44.9 in June from 44.0 in May, the fourth consecutive month that the reading has moved higher. Still, PMI remains below the 50 “boom-bust” level, suggesting the manufacturing and service sectors continue to deteriorate, albeit at a slower pace. As we noted yesterday, some recovery in sentiment is to be expected as governments’ fiscal efforts filter into the broad economy; the big question at this stage is whether growth is sustainable after stimulus cash dries up. On a comparative basis, Euro Zone GDP growth is expected to trail that of the US by an average of 1.5% over the next two years. This suggests the US will lead its European counterparts in unwinding expansionary policies and, most importantly, lead in reversing higher the trajectory of benchmark interest rates. Indeed, overnight index swaps reveal traders are pricing in the likelihood that the Fed will raise interest rates by 1.00 – 1.25% over the next 12 months as compared to 0.25 – 0.50% expected from the ECB, arguing for a yield shift in favor of the US Dollar that will put downward pressure on EURUSD.
Written by Ilya Spivak, Currency Analyst
Article Source - Japanese Yen Surges as Stocks Tumble on Global Economic Growth Concerns (Euro Open)
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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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.
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Why to trade on Forex?
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Good luck to everyone!