BUSINESS ERA

While most market participants Forex are simple machines - was estimated that 25% of all currency traders trades, taking into account the fundamental factors, compared with 30% who use technical factors. Among the intra-day traders, this ratio is probably even more in the direction outweighs technicians. However, as we have seen over the past year, fundamental releases became more and more important catalysts for a strong market movement. Based on our observations, the most significant movement of the dollar against the euro typically occur within the first 20 minutes after economic reports. The relative importance of these changes from time to time. Also, the relative importance of economic reports has tended to evolve over time. For example, in 1992 the trade balance was in first place among the major U.S. economic data to influence the movement of the dollar in the 20-minute period of time, while data for payroll (and data on unemployment benefits) were in third place. In 2004, these two indicators are reversed - the data on the payroll of the non-agricultural sectors are the main driver of the U.S. market, and the trade balance has shifted to third place. This sounds quite logical, as the market shifts its attention to the various sectors of the economy and economic data - for example, the trade balance may be given priority when the country seems to have a deficit unviable. Similarly, in the economy, which has difficulty with the creation of jobs, the data on unemployment are considered as the most important market.



According to the report published by the National Bureau of Economic Research (NBER) in 1999, the importance of economic data seen in the following order:



Forex market dealers ranked economic data on their importance (change over time)



In 1997:


1. Unemployment

2. Interest rates

3. Inflation

4. Trade Balance

5. Gross domestic product


In 1992:


1. Trade Balance

2. Interest rates

3. Unemployment

4. Inflation

5. Gross domestic product


** Calculations are based on the 20-minute reaction



What is also important to take into account - is that prices are always restored from the daily rate, so that even the strongest indicator, based on a 20-minute movement of the dollar can not be a significant engine of the market rate in the general trend. According to our own analysis of the 20-minute and daily ranges, we set up the following list of economic data on their impact on the movement of the market rate:



In 2004, (20 minutes):

1. Unemployment (Non-Farm Payrolls)

2. Interest rates (Decision FOMC)

3. Trade Balance

4. Inflation (CPI)

5. Retail sales

6. Gross domestic product

7. Current account

8. Orders for durable goods

9. Inflows of foreign capital in the United States (data from TIC)



In 2004, the (day):


1. Unemployment (Non-Farm Payrolls)

2. Interest rates (Decision FOMC)

3. The inflow of foreign capital in the United States (data from TIC)

4. Trade Balance

5. Current account

6. Orders for durable goods

7. Retail sales

8. Inflation (CPI)

9. Gross domestic product



As shown in our lists, information on billing statements in non-agricultural sectors have a significant impact on the movement of the dollar against the euro, resulting in an average of 124-punktovomu range of trading for the first 20 minutes after and 192-punktovomu trading range during the day. Interest rates are also being held on the second place in both time periods, but for other indicators situation begins to change significantly. Net foreign purchases of American securities in the general case are the average movement in the 33 paragraph in the first 20 minutes, while at day basis, these data lead to the average movement of 132 points. For other economic indicators of the average ranges in 2004 for the currency pair EURUSD were as follows:



The average 20-min. range (items)



Payroll - 124

The decision FOMC - 74

Trade Balance - 64

Inflation (CPI) - 44

Retail sales - 43

Gross domestic product - 43

Current Account - 43

Durable goods - 39

Capital inflows (TIC) - 33

Average daily range (items)

Payroll - 193

The decision FOMC - 140

Capital inflows (TIC) - 132

Trade Balance - 129

Current Account - 127

Durable goods - 126

Retail sales - 125

Inflation (CPI) - 123

Gross Domestic Product - 110


* The average daily range for the EURUSD in 2004. of 111 items



As you can see, the most significant change over the past few years has undergone a balance of trade impact on the movement of the dollar against the euro. Moreover, contrary to popular belief, throughout this time period, the report on gross domestic product was one of the most important economic indicators, and led to the smallest relative motion of the pair EURUSD. One possible explanation for this may lie in the fact that reports on gross domestic product fell less frequently than other data taken into consideration (a quarterly basis to monthly). In addition, data on gross domestic product more prone to ambiguity and incorrect interpretation. For example, growth in gross domestic product, due to increases in exports will contribute positively to its currency. However, if the gross domestic product growth occurred as a result of building inventory, the impact on the currency can be rather negative. These factors are very important to keep in mind the currency traders, regardless of what (technical or fundamental) trading strategies they use. For technical traders, trading in the range, it would seem logical to stay away from the market before the publication of data on the payroll of the non-agricultural sectors, while traders trading for a breakthrough, a publication of the data on the contrary provides excellent opportunities for trade. For fundamental traders, these results are also important, because the adjustment of the exchange rate in relation to the economic news seems to be happening very quickly - a reaction beyond the 15-30 minute period after the release of data may be the result of over-reaction of investors and trade-related with the flow customers, not only to the news. Gross domestic product is, in this respect, a perfect example, because the 20-minute reaction in the list is higher than that day. Also critically important is to interpret the data in the context of how the market sees them as important at this point in time, because from time to time there is a change in focus of the market, and the once highly relevant data may not be such as having less impact on exchange rate and vice versa, respectively.

Investors in the stock market seems to have decided on the direction of motion, and the major stock indexes so far spolzli to minimum levels in late April / early May, that did not pass imperceptible to the foreign exchange market participants. It is very painful to the deteriorating mood of investors reacted pound / dollar, however, particular attention is drawn by crosses of the Japanese currency, which reacted to the events in the stock market following a sharp fall. Yen in recent days has shown a fairly active and generally strengthening the recently become more sensitive to changes in investor sentiment. Some attribute this to the restoration of interest in it as an asset of refuge, but one European dealer notes that earlier this year, a burst of optimism in the markets could have inspired some investors to resume the strategies carry trades, and ongoing growth of the Japanese currency, perhaps a reflection of Elimination of these positions.

USD

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

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

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.

Source:www.forexhint.com

The only thing predictable about currencies these days is that they will remain unpredictable. Forgive me for speaking in cliches, but when you consider that the last twelve months have seen both record rises and record falls, I think a cliche might be justified in this case. We’ve seen the Dollar soar, only to collapse again. On the other side, we’ve seen the bottom fall out from emerging market currencies, before rising 20-30% in a matter of weeks.

Volatility levels have certainly declined (see Chart below) from the record highs of October 2008, when Lehman Brothers collapsed. At the same time, the oft-cited VIX index remains well above its average over the last decade. This suggests that while investors may have been lulled into a relative sense of security, serious doubts remain.

If the current rally is to be seen as “legitimate,” then perhaps the worst of the 2008-2009 recession is truly behind us, and the global financial system has been given a reprieve from a meltdown. The concern going forward then will naturally shift past the steps that governments and Central Banks are taking to fight the crisis, towards the long-term economic impact of those measures.

Jim Rogers, a famous and perennially outspoken investor, is now sounding alarm bells over the possibility of “meltdown” in currency markets, due to inflation and currency debasement that he views as an inherent byproduct of quantitative easing and deficit spending.

Most of the attention is being focused on the US, whose stimulus and monetary programs are probably larger than all other economies in the world, combined. Offers one analyst, “We keep very low U.S. Dollar exposures because we think a further devaluation of the greenback is imminent, and we see a structural weakness for at least a number of years.” Meanwhile, there is speculation that the US could soon receive a ratings downgrade, following a similar threat by S&P directed towards Britain. But this remains highly unlikely.

The problem that Rogers (and all other investors who are worried about currency debasement) faces is how to construct a viable strategy to protect yourself and/or exploit such an outcome. Rogers himself has admitted, “At the moment I have virtually no hedges…I’m trying to figure out what to do there.” The difficulty can be found in the inherent nature of currencies, whose values are derived relative to other currencies. While you can short the entire stock market or the entire bond market (via market indexes), you can’t short all currencies simultaneously- at least not yet.

Instead, you can pick one currency or a basket of currencies, that you believed is best protected from currency collapse and buy it against threatened currencies. But how do you deal with an environment when all currencies appears equally questionable- when all governments all loosening monetary policy and risking inflation? Really, the only answer is to invest in commodities that you think represent good stores of value, such as oil or gold, or the currencies that benefit when prices of such commodities are high. Naturally, the relationship between commodities and currencies is not cut-and-dried, and if the currency system were indeed beset by meltdown, it’s not clear to me that commodities would hold their value.

Source:www.forexblog.org

On June 1, the Forex Blog reported that Brazil is considering a forex tax on capital inflows as a way of discourage the inflow of speculative capital that is causing the Real to appreciate. It turns out that Brazil is not alone; England and France, among others, are also mulling taxes on forex transactions. Their goal is not necessarily to discourage capital inflows, but rather to raise money to fund projects that would otherwise not be viable under current budgetary conditions. The UK “levy would raise $30bn-$50bn a year - enough to double spending on health in low-income countries.” The French plan, meanwhile, would “involve taking 0.005% of the proceeds of currency transactions, perhaps on a voluntary basis, to benefit global aid projects.”

While Brazil and England/France appear to be pursuing different ends, together their plans capture the idea behind the “Tobin Tax.” Originally proposed by Nobel Laureate James Tobin after President Nixon declared the end of the gold standard, the tax would be levied on all forex transactions with the proceeds deposited in forex stability funds. One of the most popular versions would only impose the tax during periods of volatility (i.e. speculation) so as not to punish those exchanging currency for “mundane” reasons.

While still a fringe idea, the tax initially gained momentum following the 1997 Southeast Asian economic crisis, and has found new followers in the wake of the ongoing credit crisis. Consider the unprecedented volatility in currency markets of late, manifested in wild daily fluctuations.

Even the US Dollar, the world’s reserve currency, has been on a veritable roller coaster of late, rising and falling by 10% in a matter of months. Prior to the rise of forex speculation (already a $1 Quadrillion/year market!), it was rare for a currency to move that much in a year. Given that such speculation probably accounts for 90% of daily turnover, it seems obvious as to who is causing this volatility.

Don’t get me wrong; there’s a role for speculation in the forex markets, just like there’s a role for speculation in all securities markets. When markets function efficiently and players act rationally, currences should and will reflect economic fundamentals and act to minimize global imbalances. Due to the rise of the carry trade and the herd mentality, however, the oppose often obtains in practice. This can cause currency runs and or artificially inflated currencies that compel Central Banks to act counter to the way they otherwise would (i.e. by raising interest rates rapidly to deter capital flight, crimping economic growth.)

A Tobin tax would work both to minimize speculation in the short-term (by taxing trades) and promote stability in the long-term (by providing Central Banks with funds that they can use to fight speculative “attacks.” Besides, given that forex traders already enjoy favorable tax treatment - i.e. taxed below the short-term speculative rate - it wouldn’t be the end of forex trading as we know it.

Source:www.forexblog.org

In my experience, currency markets (and most other securities) markets tend to be governed by trends. There are short-term trends, long-term trends, and medium-term trends. Granted, this is an oversimplification, but generally speaking, if you were to chart a given currency pair, you could characterize its fluctuations in accordance with this paradigm.

Short-term trends are typically the focus of technical analysts, who ignore the broader forces affecting a given currency pair and instead try to discern slight trading patterns. Long-term trends, on the other hand, are the purview of economists, and reflect interest rate and growth differentials. Medium-term trends, meanwhile, unfold over a period of months (sometimes shorter, sometimes longer) and require a combination of technical and fundamental analysis to discern and trade successfully. With this post, I want to focus on the current medium-term trend, which is that of declining risk aversion.

I would not use the expression “old” news to describe the stock market (and accompanying) rallies that have taken hold broadly since the beginning of March, since it’s still be unfolding. Given that hindsight is 20/20, it now appears that the (perceived) stabilization of the US financial sector provided the impetus for the rally. In the weeks that followed, investors pulled an about-face and piled back into risky sectors and trades. The US stock market rapidly reversed course and is now trading around the level following the Lehman Brothers collapse last October.

The rally in March marked the end of one medium-term trend and the beginning of a diametrically opposed, but conceptually similar medium term-trend. Sorry to make it sound complicated, since it’s actually quite simple; in an overnight switch, investors went from being bearish and risk-averse to bullish and risk-seeking. These mindsets (and the switch between) is also reflected in currency markets. You can see from the chart below how the Australian Dollar, British Pound, and Down Jones Industrial Average have tracked each other closely over the last year, and moved in lockstep since March 3.

I suppose you could say that the correlation between US stocks and currencies represents one continuous long-term trend, and based on this chart, you would be making an accurate assessment. However, it’s equally important to unveil the underlying mindset that is driving both stocks and currencies, and is causing them to move in tandem. This is a nuanced distinction, and an important one to understand. There is a difference between a change in sentiment that causes investors to simultaneously pour money into risky investments (stocks and currencies, etc.) and a change in sentiment that causes a stock market rally and consequently, a currency rally. In the first scenario, both currency traders and stock market investors are in tacit agreement over risk-seeking, while in the second scenario, currency traders are uncertain, and hence taking their cues from the stock market.

Part of what makes a good currency trader is discerning which of these scenarios accurately describes the current reality in forex markets, so that a viable forecast and trading strategy can be implemented. Scenario 1 suggests that if the stock market rally falters, risky currencies will also decline. Scenario 2, meanwhile, suggests that currency traders would maintain their positions even in the event of stock weakness, which would cause the correlation between forex and the S&P to break down.

Source:www.forexblog.org

Pretty much every brochure advertising forex trading highlights the fact there is no such a thing as a bear market in forex. Stocks, bonds, and commodities can all lose value simultaneously (as happened when Lehman Brothers declared bankruptcy in October 2008) but it’s impossible for all currencies to decline simultaneously. A bear market in the Euro might be offset by a bull market in the Dollar; or Swiss Franc; or Brazilian Real. Regardless, you don’t have to search far to find currencies that are outperforming, whereas a stock picker would certainly have his work cut out for him during an economic recession.

I remind you of this cliche because in the current market environment, it has apparently taken on new significance. Anecdotal reports of investors frustrated with stocks, or having been burned by China, or disappointed by the collapse in oil, are flocking to forex by the thousands. Angry about suspended trading rules on stock markets? This could never happen in forex (at least not under current rules), since currencies are traded on multiple exchanges linked through a decentralized system.

Here are the stats: at Forex.com, “New accounts have increased about 30 percent a month in the last six months from pre-September levels, while the number of trades per day has risen almost 50 percent. GFT Forex said trading volume rose 187 percent from late 2007 to late 2008….By the end of 2006 [the last year apparently for which this type of data is available], average daily trade volume reached over $60 billion, a 500 percent increase from 2001…Trading volume generated by ‘retail aggregators’ — electronic trading platforms that cater to individual retail traders — rose almost 43 percent from 2007 to 2008.” This dwarfs both overall growth in forex, as well as retail growth in the bread-and-butter securities markets.

One trend worth drawing attention to is that new investors are focusing on the most popular currency pairs. [See Chart below, courtesy of Wikipedia]. It has been proposed that this is because of widening spreads (i.e. more PIPs) on less liquid pairs, but it is just as likely being caused by investors applying the stock market logic of “buy what you know” to forex. It is understandable that those new to the game would want to get their feet wet by dabbling in the Euro/Dollar/Yen, rather than diving right in to niche currencies such as the Mexican Peso or even Korean Won, whose movements are both more volatile and more difficult for the average trader to understand.

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.

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.

The Dollar plummeted against the major currencies on Monday, as Wall Street rallied. The bullishness in the U.S. stock market also spread to Britain and the Euro-Zone. The Dow Jones rose by over 1%, while the S&P extended its best rally since 1998. Amongst the biggest gainers were banking stocks. The bullish stock market led to a fall in the Dollar across the board, as traders ditched the safe-haven USD for riskier assets in Monday's trading. This was exasperated due to traders wishing to further their profits in stocks as the quarter comes to an end.

The USD slipped about 80 pips vs. the EUR to finish trading at 1.4115. This was helped as Euro-Zone economic confidence increased more than expected this month. The Dollar's behavior was much the same against the Pound, as the GBP/USD pair rose 160 pips to the 1.6634 level. The GBP's strength may have been owed to its dependence on U.S. economic optimism. However, against the JPY the greenback extended its rally for the second day, as investors dropped the "ultra" safe-haven Yen for the "less" safe-haven USD.

Looking ahead today, there is plenty of economic news that is likely to help determine the volatility in the forex market. The releases from the U.S. are set to be the key to today. Traders are advised to pay attention to the Chicago PMI at 13:45 GMT and CB Consumer Confidence at 14:00 GMT. It is also advisable to follow the direction of the equity market, as this could be a key factor in determining the Dollar's strength later.

EUR - GBP Boosted by U.S. Optimism

The Pound recorded a volatile, but bullish trading session yesterday against its major crosses, as it benefited from the optimism from the U.S. The rally in the British stock market was encouraged by Wall Street's rally. What has been much of a pattern recently has seen the Pound rising whenever equities make significant gains in the U.S. and Britain. This may be explained by Britain's dependence on the financial sector. With this sector doing well yesterday in the equities market lent the Pound a boost, helping us understand much of the behavior of the cable.

Both the GBP and EUR posted gains against the USD and JPY. The EUR/GBP was
32 pips lower at 0.8482. It seems that if global economies continue to prove, then we may see this pair continue to approach the 0.8400 level in the short-medium term.
The EUR was also helped yesterday by strong economic confidence figures from the Euro-Zone. This is a further signal that the economic situation in the Euro-Zone isn't as dire as some analysts originally forecast.

Today, there is plenty of data coming out of Britain and the Euro-Zone that is likely to determine the GBP and EUR crosses in today's trading against the major currencies. From Britain there is the release of the Nationwide HPI at 6:00 GMT and Current Account and GDP data at 8:30 GMT. From the Euro-Zone there is the publication of German Unemployment Change figures at 7:55 GMT and the CPI Flash Estimate at 9:00 GMT.