8.20.2009

BOE Reveals Doubt over Short-Term Recovery

Yesterday's bearish behavior by the GBP was felt by many traders as the Bank of England's (BOE) Monetary Policy Committee (MPC) released the minutes from a recent meeting regarding interest rates and quantitative easing. There was a hint of dissension among the policymakers with some calling for a greater extension of the quantitative easing program which ended up pumping an additional 50 billion Pounds into the UK market recently. Fears over weak inflationary growth and market downturns have some MPC members lobbying for more aggressive measures, which puts pressure on the Pound.



USD - The Dollar Turns Down as US Stocks Rebound

The greenback fell against 11 of its 16 major currency counterparts Wednesday before a report, expected to show an index of U.S. economic indicators, rose for a 4th consecutive month. The U.S Dollar traded near a 1-week low against the EUR on speculation economic data will add to signs the global recession is easing, prompting investors to seek higher-yielding assets. The Dollar changed hands at $1.4230 vs. the EUR down from $1.4127 yesterday.

The U.S. Dollar was supported in earlier trading by declining U.S. stocks, following Chinese markets, prompting investors to move toward assets perceived as less risky.
However, the Dollar weakened against the Japanese yen, although it came off the day's worst levels, as a sharp slide by China's stock market overnight raised concerns about the global economic outlook and boosted the Japanese currency's allure.

In recent months, the USD has tended to fall as stock prices and risk appetite rises, giving investors less impetus to buy dollars as a safe haven. In the absence of fresh economic data, currencies were mostly following stock prices for direction. Traders may see more volatility and choppy trades given that not much is happening in terms of events. So any correction to stock markets could be a key driver for the USD currency.

EUR - The EUR Hits Session High above $1.42

Europe's single currency gained versus 11 of its 16 major rivals on Wednesday as economists said the Markit Economics' composite index of both industries may be the highest in a year. The index is based on a survey of purchasing managers and due for release on Aug. 21st. The EUR added to gains against the U.S. Dollar, rising 0.6%, as stocks pared losses and oil prices rose sharply. The EUR also pared losses against the Yen and was last down 0.1% at 133.60 yen, off a one-month low of 132.16.

The European currency rose from near a 1-week low against the GBP on speculation a European report this week will show manufacturing and service industries contracted at a slower pace, adding to signs the recession in the 16-nation region is abating. The British Pound weakened 0.9% to 86.07 pence per EUR and dropped 0.2% vs. the Dollar to $1.6534.

The GBP extended losses after Bank of England (BOE) meeting minutes showed that some policymakers had wanted to extend quantitative easing by more than the amount decided. The central bank is spending 175 billion pounds to buy assets in a move aimed at pushing down borrowing costs to revive the U.K.'s shrinking economy. Asset purchases require the BOE to print money, which some investors fear may lead to an oversupply of the Sterling and eventual inflation.

JPY - JPY Rises as Chinese shares fall more than 2%

The Japanese yen rose versus other major currencies on Wednesday as a fall in Chinese shares made investors cautious about returning to risky investments. The Yen climbed to its strongest level in 3 weeks against the U.S. Dollar after China's benchmark stock index fell into a so-called bear market, reigniting concern that the global economic recovery is stalling.

China's main stock index, which tracks the bigger of China's stock exchanges, slumped 4.3%, leading other Asian bourses lower and boosting demand for the Yen as a refuge. The Yen typically rises during times of financial turmoil because Japan's trade surplus reduces the nation reliance on foreign capital. The JPY also gained against all 16 major counterparts after the Daily Telegraph cited Hartmut Schauerte, the economic state secretary, saying Germany is preparing measures with the Bundesbank in anticipation of a new credit crunch wave early next year.

Crude Oil - Oil Rallies on Sharp U.S. Inventory Data

Crude prices soared above $73 a barrel on Wednesday, as rising U.S. equities and an unexpected drop in inventories propelled oil prices to finish at their highest level since early June. Oil surged as much as 5.2% yesterday after crude stockpiles dropped 8.4 million barrels last week, the most since the week ended May 23, 2008, an Energy Department report showed. Crude Oil also gained as the U.S Dollar declined against other currencies, increasing the appeal of commodities to investors looking for an inflation hedge.

Oil prices fell earlier on Wednesday, hitting a low of $68.05 after a near 5% slump in Chinese shares sent doubts rippling through global markets about the strength of the world economic recovery. Traders also watched for storms in the Atlantic Basin but no immediate threat was seen to U.S. oil installations in the Gulf of Mexico. Expectations for a potential rebound in the economy could increase fuel consumption and have already helped lift prices.

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British Pound Holds 1.65 Level Against US Dollar Ahead of Retail Sales Report (Euro Open)

The British Pound held on to the 1.65 level against the US Dollar after coming off the late NY-session high in overnight trading ahead of a report that is set to show Retail Sales grew for the second straight month in July. Switzerland’s Trade Balance and ZEW survey of investor confidence are also on tap.

Key Overnight Developments

• Australia Recalls Ambassador to China for ‘Urgent Meeting’
• RBA Sold A$705 Million into Currency Markets in July
• Euro, British Pound Yield Flat Result After Choppy Session

Critical Levels



The Euro stands effectively flat having spent much of the overnight session in choppy consolidation above the 1.42 level. The British Pound followed suit, oscillating above the 1.65 mark.

Asia Session Highlights



Australia's ambassador to China, Geoff Raby, was told to return to Canberra on such a short notice to participate in urgent talks considering the waning relationship between the two countries, reports have said. Moments ago, Prime Minister Kevin Rudd stated that Australia-China relations are full of challenges. Much of the diplomatic tensions came after China detained Rio Tinto executive Stern Hu in an espionage dispute. It is of some worry that trade between the two nations will suffer as a result. Grief between the two comes during a period in which the 1.3-billion person nation found itself to be the largest single country destination for Australian exports. Since the start of the year, Australian shipments to the Asian country have surged 54%. But with Australia failing to even show up in the official export statistics figure for China, it appears as though the latter has less to worry over its ties with the former.

The Reserve Bank of Australia reduced the level sold of its domestic currency in July to A$705 million after a month in which they sold a record amount, A$1.943 billion. Since the start of the year, the bank has sold a net total of nearly A$6.0 billion in the foreign exchange market. Selling has come during a period in which the Australian Dollar gained 16.3% on a trade-weighted basis and 19% against the greenback. Price action of this nature probably hurt the country's export sector in an already weak global trading environment. June, however, saw these efforts pay off after the trade balance unexpectedly shrunk for the first time since March on export strength.

Euro Session: What to Expect



UK Retail Sales are set to add 0.4% in July, the second consecutive month in positive territory. The annual pace of growth is expected to register at 2.7%, a bit lower than the previous month’s 2.9% result but certainly better than the -2.0% drop registered in May, the largest in 17 years. The metric has seen atypical volatility over recent months as rising unemployment levels grappled with rebounding asset values and government stimulus for dominance over consumer sentiment. On balance, we see the downside scenario as more plausible: fiscal support is inherently limited with the UK budget deficit already set to average over 12% of GDP though 2010, threatening the country’s sovereign credit rating; meanwhile, global equity valuations are looking increasingly overdone having finished last month at the highest level relative to earnings since 2003. Unemployment growth, meanwhile, looks far more permanent, with a survey of economists conducted by Bloomberg expecting a steady rise to put the jobless rate just shy of 9% by the end of next year. Clearly, this points to the likelihood of a down trend in retail activity for the time being.

Turning to Switzerland, the Trade Balance surplus may narrow again in July as exports extend a multi-month downtrend after dropping by a whopping 23.5% in the previous month, driven lower by lackluster demand in the mountain nation’s main overseas markets. On the opposite side of the equation, the import price index fell at the fastest pace on record in July, suggesting a healthier domestic appetite for overseas goods than the other way around. Separately, the August edition of the ZEW Survey of investor confidence is also on tap.

Written by Ilya Spivak, Currency Analyst and Luis Gil, DailyFX Research
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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!