6.29.2009

Dollar Rises on Reserve Currency Debate

After falling broadly late last week, the U.S dollar regained some ground on Monday as the market is watching cautiously to see if China will keep making comments on the reserve currency. China's central bank did not mention the Dollar by name on Friday but said it was a serious defect in the international monetary system that one currency should dominate.

Debate about an alternative international currency has heated up in recent months and central bankers gathering in Basel this weekend also discussed the dollar's role. Still, the dollar will keep its role as reserve currency, as China is unlikely to change the composition of its foreign currency reserves any time soon. That's dollar positive analysts said.



USD - USD Up despite Recent Downward Pressures from Abroad

The US Dollar, after dropping last week due to renewed calls from China and Russia to switch to an alternate reserve currency, began to steadily strengthen in today's early morning hours. From a peak high above 1.4100 against the EUR, the USD has pared some of these losses and is currently trading just above 1.4000. Versus the British Pound, the greenback has gone from 1.6550 back towards 1.6450, remaining within the range this pair has experienced over the previous 2 weeks.

While China's recent call for a new international reserve currency, and Russia's support of such an action, has put downward pressure on the USD lately; the impact has been somewhat muted. It has been forecast a number of times that the greenback will begin to depreciate against most currency pairs as the global economy recovers. As one of the world's leading safe-haven investments, the Dollar will no doubt take a hit from an increase to risk appetite which naturally stems from economic recovery.

China and Russia added to this weight with a call for portfolio diversification, which in fact carries roughly the same impact as calling for the purchase of riskier assets. For economic giants, such as these two countries, to call for a diversion away from the largest economic rival is a basic economic weapon aimed at gaining a larger market share. The problem is that they lay out a general economic plan which is already understood to be in motion. This is why the impact was muted, and why the USD will still experience multiple up-ticks in the near future.

Looking forward to today's trading, however, will see traders with little economic news to wager on for the US Dollar. Britain and Japan appear to be releasing the bulk of today's news, which means we may see a day of trading with low liquidity and increased volatility. Day-traders can take advantage of these intense trading days by swinging within the larger-than-normal price fluctuations.

EUR - EUR's Mixed Results due to High Optimism, Bleak Data

The EUR has been uncertain in its direction lately, despite clear calls for a buy-up of this higher-yielding currency during times of mild economic optimism. Positive news from the Euro-Zone typically leads to an increase to risk appetite, which is definitely something which traders saw last week. The EUR started Friday just under 1.40 against the USD, but steadily rose above 1.41 before the end of last week's trading. The EUR even peaked around 0.8550 against the Pound, despite the moderate drop towards 0.8520 at the end of Friday's trading session.

Many of the economic indicators being released these past 2 weeks have shown that the Euro-Zone is experiencing a boost in consumer optimism. This has come about despite a growth in budget deficits and continuously shrinking manufacturing output and GDP. The people have started looking forward to better days, but the numbers still tell a bleak story. One of the primary impacts of such data is that the EUR has showed heavy signs of a comeback, but fraught with nasty downturns as its rivals make headway from periods of instability.

As for this week, the 16-nation currency has leveled-off in today's early trading sessions, but it appears to be poised for a rather sharp movement today or tomorrow. The EUR looks to be consolidating towards significant price barriers against most of its currency rivals and will either go through a massive drop or, more likely, strengthen as economic indicators continue to show a growth in optimism, and possibly a chance to poke holes in the USD's most recent gains. Traders should pay attention to the few economic indicators released today as the story is being told solely by Europe and Great Britain. With a silenced US economy, we could see much more predictable price movements from the European currencies.

JPY - Yen Declining as Consumer Spending Expected to Fall

Despite the grueling downward trend the JPY experienced last week against its currency counterparts, the Yen now appears to be flattening out. The only currency which seems to have bested the Yen in today's early morning hours is the USD which has climbed from 95.15 to the 95.50 level, with the possibility of reaching 95.80 in the coming hours. Against the EUR and GBP, the Yen has done very little in terms of price movement, consolidating towards the price of 138.90 and 157.30, respectively.

As industrial production in Japan rises for 3 consecutive months, there are some analysts who forecast a faster-than-anticipated recovery for the island economy. On the other hand, consumer spending in Japan has typically played a large part in economic growth, but these figures are expected to continue plummeting this week. Also putting mild pressure on the JPY is the fact that unemployment in Japan has finally reached over 5% and is still climbing. With such negative economic news it is hard to expect a strong recovery in the Yen anytime soon.

OIL - Oil Prices Still Failing to Stay above $70

No matter how much downward pressure there appears to be on the value of the US Dollar, the price of Crude Oil still seems to have difficulty finding support above $70 a barrel. Dropping from over $71 to as low as $69 last Friday, the price of the black gold has continued its plunge in today's early trading hours and currently sits near $68.50 a barrel.

As expectations for fuel and energy demand have been decreased these past weeks, many speculators are now beginning to price in the reality that oil prices may not find the support necessary to climb successfully above $70 in the nearest future. Without a sudden short-fall in supply, the price will no doubt reflect this reality. Traders may anticipate a series of fluctuations above and below the $70 price range as the market searches for a true range of the value of Crude Oil.

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US Dollar Surges as China Backtracks on 'Super-Sovereign Currency' Comments (Euro Open)

The US Dollar surged in overnight trading after China backtracked on last week’s call for a ‘super-sovereign’ currency, saying their foreign exchange reserve policy was “quite stable” and easing fears of looming diversification away from the greenback. A tame economic calendar is likely to yield to risk trends in European hours.

Key Overnight Developments

• New Zealand Trade Deficit Narrows as Imports Fall Most in 16 Years
• Japanese Retail Trade Stalls in May on Rising Unemployment
• US Dollar Surges as China Backtracks on ‘Super-Sovereign Currency’

Critical Levels



The US Dollar surged in overnight trading after China’s central bank chief Zhou Xiaochuan said his country’s foreign exchange reserve policy is “quite stable”, alluding to the fact that the world’s largest holder of US Treasuries will not be diversifying away from the greenback for the time being. China’s call for a ‘super-sovereign’ currency weighed on USD last week. The Euro tested as low as 1.4002 while the British Pound touched 1.6450 ahead of the opening bell in Europe.

Asia Session Highlights



New Zealand’s Trade Balance deficit narrowed more than was expected in May, shrinking to -NZ$3.04 billion from -NZ$4.1 billion in the previous month. Economists had forecast a -NZ$3.64 billion result ahead of the release. The improvement came as imports tumbled -20.7% from a year prior, the largest decline in over 16 years. The unemployment rate has surged to 6-year high at 5%, discouraging consumption, including that of imported goods. The result reinforces the dynamic we noted last week as first quarter current account figures crossed the wires, painting a picture of weak consumer demand that is made all the more ominous in the context of a 17.6% currency appreciation in the four months through May that would reasonably be expected to boost New Zealanders’ purchasing power of foreign goods. Private consumption accounts for 62.3% of overall economic growth and continued weakness in domestic spending makes it unlikely that the smaller antipodean nation can mount a meaningful recovery from the current downturn in the near term. Indeed, GDP shrank more than economists expected in the first quarter, contracting at the fastest pace in over three decades.

Japanese Retail Trade came to a standstill as expected in May after adding 0.6% in the previous month. In annual terms, receipts shrank at a rate of -2.8% for the second consecutive month, stalling a rebound from a record low at -5.7% recorded in February. The unemployment rate has advanced to the highest in over 5 years, weighing on disposable incomes and trimming spending. More of the same is likely in the months ahead as lackluster global demand keeps output levels low and labor forces lean. Indeed, minutes from the last Bank of Japan policy meeting saw policymakers note that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.”

Euro Session: What to Expect



Euro Zone Economic Confidence figures are expected to tick up in June, though as we have noted previously, 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. This suggests the Euro is likely to look past the data docket with near-term price action taking directional cues from trends in risk appetite, with EURJPY and EURUSD still 83% and 88% correlated with the MSCI World Stock Index, respectively.

Turning to the UK, Net Consumer Credit is set to remain at 0.3 billion pounds in May, unchanged from the previous month, while Mortgage Approvals grow by 46k, extending a rebound from record lows in November 2008 for the sixth month. The upswing may prove little more than a correction, however: Rightmove Plc reported last week that house prices fell for the first in five months in June as banks raised borrowing costs in anticipation of a stabilizing global economic environment, hinting that credit growth will stumble in the months ahead. Barring a sharp deviation from expectations, British Pound price action is unlikely to dwell too deeply on these releases, focusing on cues from stock and commodity markets to set directional momentum.

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!