7.03.2009

Dollar Soars as its Global Reserve Currency Status Returns to the Forefront

The Dollar soared yesterday against most of its currency pairs, as its global reserve currency status returned to the forefront. This was due to weak U.S. unemployment figures, as Unemployment in the U.S. rose far higher than analysts had forecast. This spurred demand for safe-haven currencies, such as the USD and JPY. As a result of the strong USD, Crude Oil prices also tumbled. Today, investors should continue trading the USD, EUR, JPY, and Gold, as large profits will be made on market volatility.



USD - Dollar Gains on U.S. Unemployment Data

The U.S Dollar gained about 1% versus the EUR and Canadian and New Zealand currencies Thursday after the U.S. government reported more job losses than expected, renewing concerns about the economy and enhancing the greenback's safe-haven appeal. U.S. employers cut 467,000 jobs in June, far more than expected, while the Unemployment Rate rose to 9.5%, the government said in the report. The Dollar also benefited from a Chinese Foreign Ministry official's comments, which dampened speculation about diversification of currency reserves.

It is important to take into account that yesterday's data raised the risk aversion of investors, which also helped push the Yen higher vs. the USD. The Dollar finished trading at 95.95 Yen, from 96.60 Yen on Thursday. However, this week, the Dollar has advanced over 0.5% against the Yen.

The greenback faces some risks though. Analysts said that the weak U.S jobs report reinforced a trend already in place in the forex market prior to the release that the Dollar was oversold. Traders are still favoring foreign currencies over the U.S Dollar, and the sentiment remains to sell the USD in the short-medium term. With a light U.S. economic calendar today, currency investors may focus instead on the USD's detriment, such as U.S. fiscal deficit and inflation.

EUR - EUR Tumbles on Interest Rate Decision

The common European currency weakened against the U.S Dollar and Yen yesterday after the European Central Bank (ECB) kept its benchmark Interest Rate unchanged at 1% as expected. The ECB also stuck with the amount of covered bond purchases in its plan. The EUR declined amid speculation that ECB policy makers will say today that they don't see a need for additional measures to revive the Euro-Zone economy.

Analysts said that demand for the EUR fell after European Central Bank President Jean-Claude Trichet stated that Euro-Zone activity would likely remain weak for the rest of the year, and recovery may not start until the middle of 2010. The EUR traded at $1.3980, from $1.4115 yesterday. Against the Yen, the EUR declined to 134.15 Yen, from 136.53 Yen. The Europe's 16-nation currency may drop to the lowest level in more than 2 months against the Dollar in the coming week, as risk aversion increased after a report showed that U.S. employers cut more jobs than forecast in June.

JPY - Yen Benefits from Safe-haven Status

The Japanese Yen advanced against all 16 major currencies on Thursday after a U.S. government report showed employers cut more jobs last month than economists forecast. This prompted investors to sell higher- yielding assets. The Yen rose for a second day against the EUR as Asian stocks fell on concern that the global recession will be prolonged, spurring demand for the safe-haven JPY.

The Yen advanced to 134.21 per EUR from 136.33 yesterday in New York. Against the Dollar the Japanese Yen rose to 95.95 Yen from 96.60 Yen. The Japanese currency typically strengthens in times of financial turmoil, as Japan's trade surplus makes the currency attractive due to the nation not having to rely on overseas lenders. Additionally, the Dollar is bought as it is the world's main reserve currency.

Crude Oil - Crude Hits 1 Month Low on Rising U.S. Unemployment

Crude Oil prices tumbled about 4% Thursday, reaching its lowest level in a month. Crude also recorded its 3rd weekly loss in a row, as a disappointing jobs report rekindled concerns over U.S economic recovery. Also weighing on Crude prices was the USD's strength against most of its crosses. Furthermore, the oversupply of Oil in the market helped weaken Oil prices, and if the situation continues, OPEC is unlikely to increase output in the group's next meeting on September 9th.

Analysts stated that the disappointing U.S jobs numbers raised concern about the strength and timing of a U.S. and global economic recovery. The report confirmed what we saw earlier in the week with the lower U.S. Consumer Confidence figures. In turn, this reinforced the outlook for weak Crude Oil demand, and will continue the downward pressure on Crude prices into next week's trading.

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Swiss Franc Threatened as CPI Falls Most in 33 Years, Points to SNB Intervention (Euro Open)

The Swiss Franc looks vulnerable in the coming session as June’s headline inflation data threatens to embolden the central bank’s efforts to depreciate the currency. The Consumer Price Index is expected to shrink at an annual pace of -1.1% in June, the fourth consecutive month of losses and the largest drop in at least 33 years.

Key Overnight Developments

• Australian Service Sector Expands For The First in 15 Months
• Euro, British Pound Retrace Higher After NY-Session Losses
• Chinese Central Bank Chief, Former VP Comments Support USD

Critical Levels



The Euro retraced moderately higher in the overnight session after sustaining heavy losses in US trading hours, adding as much as 0.5% against the US Dollar. The British Pound followed suit, testing as high as 1.6394 to the greenback.

Asia Session Highlights



Australia’s service sector grew for the first time in 15 months in June. The AiG Performance of Service Index rose past the 50 mark, the break-even point indicating expansion, rising 10.3 points from the month prior. The metric failed to garner considerable attention form the market with traders discounting the outcome as driven by the government’s aggressive spending efforts, with the big question going forward continuing to be whether the economy will retain current momentum after the flow of stimulus cash dries up.

China’s former Vice Premier Zeng Peiyan said he “sees no dramatic change in the international currency system” while the central bank head Zhou Xiaochuan said that “lower US demand poses a risk for China, [threatening] overcapacity, weaker economic growth, and unemployment.” Both comments hint at China’s confidence in and support of a stronger US Dollar, suggesting Beijing will continue to accumulate US assets (Treasury bonds in particular) to keep the domestic currency relatively cheap against the greenback and support the export sector.

Euro Session: What to Expect



The Swiss Franc looks vulnerable in the coming session as June’s headline inflation data threatens to embolden the central bank’s efforts to depreciate the currency. The Consumer Price Index is expected to shrink at an annual pace of -1.1% in June, marking the fourth consecutive month in negative territory and the largest decline in at least 33 years. The statement issued by the Swiss National Bank following their quarterly policy meeting in June said that the risk of deflation “remains a concern” and reiterated their aim to continue driving long-term borrowing costs lower by buying local currency-denominated bonds and committed to “take firm action to prevent an appreciation of the Swiss franc against the euro.” At this point, the SNB expects inflation to shrink -0.5% on average over 2009 and rebound to add 0.4% next year. The International Monetary Fund (IMF) seems to disagree, however, calling for CPI to fall -0.6% this year and -0.3% in 2010. A downside surprise in June’s report could open the door for traders to punish the Franc as they price in a likelihood that the SNB’s outlook will prove too rosy, requiring the bank to step into the forex market at an accelerated pace to drive down the CHF exchange rate. The possibility of such an outcome seems reasonable considering the leading Producer and Import Prices reading fell by a greater-than-expected -5.0% in May, topping forecasts for a -4.7% decline.

Turning to the Euro Zone, Retail Sales are expected to fall -0.1% in May to bring the annual pace of decline to -2.7% and reversing two consecutive months of slowing losses. On balance, receipts continue to move firmly in line with the downward trajectory that has held since sales topped out in December 2006. Lackluster consumption has trimmed an average -0.9% off overall economic growth in the six months ending in March and losses are likely to accelerate as European companies continue to shed jobs: the jobless rate hit the highest level in a decade in May and is expected to top 10% by the end of this year according to a survey of economists conducted by Bloomberg.

In the UK, June’s services Purchasing Manager Index is set to show that the sector expanded for a second consecutive month after the metric swung above the 50 “boom-bust” level in May for the first time since April 2008. The most recent economic forecast from NIESR, a think tank, suggested “the trough of the depression, with output rising in April and May” after GDP shrank -2.4% in the first quarter, the most since 1958. To that effect, first-quarter Housing Equity Withdrawal figures may a muted impact as the metric falls to a record-low -9.0 billion pounds as a terrible three months to March have likely already been priced into the exchange rate. On balance, consensus economic growth forecasts suggest that the UK will trail behind the US but outpace the Euro Zone through the end of 2010, suggesting the Bank of England will follow the Fed but lead the ECB in lifting interest rates as the recovery firms. All told, this points to a bearish bias for both GBPUSD and EURGBP in the months ahead.

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!