Worldwide Recession

The experience with Japan might be a great opportunity for some people. But we can see mix result between yen and other currencies. USD/JPY is not giving any clear indication of trading direction, it fell against the GBP, and EUR/JYP maintains its bullishness throughout yesterday's trading. Although, Yen's strength in recent months has had a positive effect leading to more investment in the Japanese currency, global economy is in great danger and Japan is not an exception. I’d pay more attention to today's Japanese economic indicators, as a stronger than expected result may strengthen the JPY.

http://angelatrix.wordpress.com/

Currency trading markets have never been more correlated to the US Dow Jones, Crude Oil, and other key assets. The financial crisis has essentially created cross-market correlations that never previously existed. All the while, we have seen more traditional correlations pick up substantially; the link between the Japanese Yen and the US Dow Jones Industrials Average has never been stronger.
Every downward move in global equity indices encourages traders to close short positions in the low-yielding Yen fully consistent with the broader theme of financial deleveraging. Continued losses in the Dow and other major markets would likely lead to further JPY rallies. We may continue to see the Euro/US Dollar move inversely to rate expectations. If higher central bank interest rate expectations translate into financial market deterioration, the US dollar could continue to gain. Any further deterioration in global financial conditions would signal a continuation of said trends, and it seems that British Pound forecasts will largely depend on the future of financial risk appetite. If we see further recovery in UK equity markets, the British pound could quite easily rally further off of its recent multi-year lows against the US Dollar.

Hi,

It is always difficult to make exchange rate forecasts, particularly when the currency market is very volatile. Even so, i have been arguing that a considerable deterioration of the euro zone economy in 2009, could lead to a significant shift of interest rate differentials in favor of the U.S. dollar and keep the EUR/USD under pressure over the next few months. Indeed, recent economic data points toward weakening of real GDP growth in the euro zone economy and a more accommodative monetary policy by the European Central Bank could be needed to prevent the region from falling into a much deeper recession. On the other hand, the recent sell-off in commodities, particularly in oil, should alleviate some downward pressure from the U.S. economy which has been running a current account deficit of nearly 5 percent of the GDP.

Regards

The US Dollar took some punishment today as bonds sold off and stocks began to rally.

However, one day of losses does not change the bullish dollar trend. Regular economics do not apply in times like these. In normal market conditions, expected returns hang in a delicate balance with a general tolerance for risk. In fact, the setting for the markets is clearly far from normal.

Just look at the advance in the US dollar last week immediately following the report of a 533,000-person drop in national payrolls.

How long can a market go against basics law of market theory? That depends on speculators. As long risk sentiment holds as the dominant trend across all asset classes and all markets, caution will keep capital flowing towards safe havens.

http://angelatrix.wordpress.com/2008...risk-appetite/

Hi

Faced with the threat of deflation, the Federal Reserve (Fed) may be trying to drive the dollar lower to spur inflation. As policy makers don’t want home prices to deteriorate further, an alternative is to inflate the prices of all other goods and services: as a result, the relative prices of homes would be less expensive. Weakening the dollar is an effective policy tool to drive up inflation as the cost of import goes up. Just be careful: the Fed may be getting more than it is bargaining for. Fed Chairman Bernanke believes that a weaker dollar will only drive up inflation modestly; in our humble opinion, we believe he may be mistaken. Foreigners have a limit on how much margin pressure they can absorb before they have to pass on the higher cost of doing business. We saw this phenomenon in the spring time, when higher commodity prices forced Asian exporters to drive up prices; import prices into the U.S. were up over 20% year over year (and still up substantially after factoring out what was soaring oil prices at the time). No country has ever depreciated itself into prosperity and the U.S. is unlikely to be the first.

I have a small question for you guys.
I’ve seen broker’s spreads have tightened since October and they are offering really low spreads. Do you think that’s a consequence of the recession or it’s just because of Christmas season?
Regards

Hey ForexJam

The US Dollar has retreated against the major forex currencies over recent days, suffering most at the hands of the Euro –which has become really strong now- and the Japanese Yen. Prices are now poised to test pivotal support and it suggests the current retracement may be ready to turn over. Inflation and housing data are due to cross the wires before hand and are expected to strengthen the case for further easing.

However, if we see prices ease less than expected, it could raise inflation expectations which may lead the central bank to keep rates on hold, which could send the dollar soaring. Some analysts think that is the Euro the Queen of all currencies rather than Usd or Jyp. These “save heavens” have been changing a lot since October. Do you think this is because of the rates cuts or there is also more behind it?

http://angelatrix.wordpress.com/2008/12/17/federal-reserve-is-expected-to-announce-another-reduction-but-scenarios-looks-pessimistic/

I think spreads are low because of the Christmas season and competition between brokers. They just want to get attention.

On the other hand, Interest rates have changed dramatically over the past year to eighteen months with the upheaval in credit markets and the onset of a global recession. And, while the resulting plunge in investor sentiment has claimed many casualties along the way, the carry strategy seems to be one of the hardest hit. However, investors will not sit on idle capital for long; and eventually a turn in sentiment will put investors and banks back on to yield and into the carry trade.

The antithesis of the US dollar, the euro holds a unique position among the potential carry currencies. From an interest rate perspective, the European Central Bank has been one of the most reserved policy groups in lowering its target rate. More importantly, officials have suggested further easing will come at a much slower pace. And, while the European benchmark rate does not have as much yield potential as its Australian counterpart, the stability of their monetary policy and the bank’s focus on inflation put its on a solid foundation.

Fraud-linked bankruptcies like Enron, WorldCom and Adelphia have kept U.S. courts busy for years. A study revealed that companies that are cited for financial-statement fraud were twice as likely to file for bankruptcy as those that were not cited. It was not clear whether employees at bankrupt companies are more likely to commit fraud or whether the microscope of bankruptcy makes it easier for regulators to detect it. The most common type of fraud detected at both bankrupt and nonbankrupt companies was improper revenue recognition.

Hi AngelaTrix
Thanks for the update. According to the article i read at Finexo, the dollar depreciated in the markets ahead of scheduled housing data for tomorrow projected to show further weakness in the housing market while investors remain highly sensitive to any data from the housing sector as this was the start of the downfall in the U.S. economy. Also the dollar is under pressure as there are speculations in the markets that the Feds will inject money into the economy as way to stimulate economic growth.

The euro appears to have found significant strength recently. The currency market is favoring the euro against both the U.S. dollar and the U.K. pound. Both currencies are finding it hard to stop the euro in forex trading as their economies continue to struggle. Euro strength and dollar weakness further emerge in thin trading activity as geopolitical uncertainty creeps higher. Euros anti-dollar attribute is being underscored by the ECBs reluctance to telegraph further easing, the negative releases from the US and the ensuing geopolitical uncertainties from the Middle East and South Asia. Euro strength is creeping across the board, hitting fresh all time high against Sterling at 0.9795, paving the path for parity as early as this week.

http://angelatrix.wordpress.com/2008...d-over-europe/

Hey guys I think you should concentrate in particular news affecting the market. Check this:
The EUR has started the New Year in a complete reversal from where it ended. The European currency has shown considerable weakness against both the Dollar and the Pound. The last two days of trading have seen sharp reversals in both the EUR/USD and the GBP/EUR. Yesterday the EUR/USD closed the day sharply lower at 1.3546, while the EUR/GBP also saw heavy losses to end the day down at 0.9290.

I agree with you .Fundamentals are once again driving the depreciation of the EUR which may be influenced by indicators due to be released from Great Britain and the U.S. From Britain, the Services PMI index will be released, and from the U.S. the Pending Home Sales. Traders should look to the Home Sales report to potentially beat market expectations for an influence on the EUR/USD price.

The British economy is suffering more than other economies from the recession, yet today the pound made a "comeback".
Can anyone explain this?

The GBPUSD has gone through 1.50 after having tested 1.45 just yesterday. Additional upside is expected. The next resistance is former support at 1.5259. The British pound has spent most of December drifting toward support at 1.4400, as the markets anticipated that the Bank of England will continue cutting rates aggressively. However, the comeback might be related to speculation about the Bank of England expanding a 200 billion pound program that allows banks to buy illiquid securities in exchange for government debt.

The tight credit markets continue to impact the economy which was evident in the employment report which showed jobless claims of 77,900 and the unemployment rate reaching the highest since 2000 at 3.6%. The troubles of the banking system may ultimately force the government to nationalize banks and start buying corporate bonds and commercial paper to improve lending to businesses and consumers. Risk aversion flows had the single currency on the run before Hawkish comments from ECB President Trichet and other committee members fueled support. The MPC leader would reaffirm his contention that the region was not at risk for deflation and that it should be disciplined and maintain its medium term perspective. The comments would reinforce earlier ones by committee member Nowotny that there are no plans for a zero interest rate policy.

What FX Master said is true.
There are some key issues when trading news:
* - Backtesting and a strong Technical Analysis support must be needed. Here is a good example of that: http://expertsmt4.wordpress.com/2008...aims-strategy/
* - You must create a EA (a software) to avoid requotes and to enter at the right time.
* - Don't trade news has little or none influence on the market. That is news that affects the market in 10 to 50 pips are very difficult to make money with due to spreads.
* - Trade big news those that can move the market more than 100 pips. In order to avoid wide spreads you must trade long term movements.
* - Be sure you have the right source of information. You might want to check Reuters, DailyFX, and some blog about news: http://angelatrix.wordpress.com/
* - Find a good broker with a great bank support which would allow the broker to fix tight spreads. These brokers are difficult to find but if you check Oanda, Tradeview Forex, ACM, and a few more, you could find something good.
If any of these issues are missing you might stay out of the market during a news release.