6.23.2009

World Bank Forecast Returns Traders to Safe-Havens

The US Dollar has made some solid gains this week following news from the World Bank (WB) that economic forecasts for growth in 2009 are showing a 2.9% contraction, as opposed to the previous forecasts of 1.7%. As political turmoil in Iran and the show-down with North Korea continue, investors have felt a slight drop in confidence in markets lately and pulled their investments back into safe-havens such as the USD and JPY, which explains their sudden rise in value yesterday. This move back to less risky investments appears to be continuing today.



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.

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Japanese Yen Surges as Stocks Tumble on Global Economic Growth Concerns (Euro Open)

The Japanese Yen added a full percentage point in overnight trading, boosted by safety demand as Asian stock exchanges followed Wall St sharply lower on continued fallout from the World Bank’s discouraging global economic growth forecast. Switzerland’s Trade Balance and Euro Zone PMI are on tap in European hours.

Key Overnight Developments

• Japanese Yen Gains as Stocks Tumble Across Asian Exchanges
• US Dollar Looks Past Risky Assets, Consolidates in Overnight Trading

Critical Levels



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
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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!