FOREX MAKETING / FOREX TRADING / FOREX ANALYSIS

Monday, Aug 10, 2009, 14:38 GMT
By John Hardy Consultant/FX Strategist Saxo Bank
Key days ahead for USDJPY as FOMC meeting likely to help decide whether rally is overambitious or a sign of more to come.
USD shaking off past behavior as positive employment sees USD strength. EURUSD looking to follow up on correction lower this week?
MAJOR HEADLINES – PREVIOUS SESSION
New Zealand Jul. QV House Prices fell -5.0% YoY vs. -7.1% in Q1.
Japan Jun. Adjusted Current Account Total out at ¥1799B vs. ¥1350B expected
Japan Q2 Housing Loans rose 0.4% YoY vs. 3.5% in Q1
Australia Jun. Home Loans rose 1.1% vs. 1.8% expected
Japan Jul. Preliminary Machine Tool Orders fell -72.2% YoY vs. -72.8% in Jun.
Norway Jul. CPI out at -0.6% MoM and underlying CPI at -0.6% vs. -0.2%/-0.2% expected.
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
UK Jul. BRC Retail Sales Monitor (2301)
UK Jul. RICS House Price Balance (2301)
Australia Jul. NAB Business Conditions/Confidence (0130)
China Jul. Producer/Purchasing Price Index (0200)
China Jul. CPI (0200)
China Jul. Retail Sales (0200)
China Jul. Industrial Production (0200)
China Jul. Trade Balance (no time given)
Japan BoJ Target Rate (no time given)
Japan Jul. Consumer Confidence (0500)
Market Comments:
Friday saw a watershed break from recent behavior in the USD, as the extension in the equity market rally failed to punish the greenback - a pattern we have seen so many times in the recent past. The Yen was the biggest loser vs. the dollar initially as bonds also came under significant pressure in an all-out riskfest immediately after the US employment report. But the European currencies have opened the new week here on a weaker note as equity markets have corrected lower after the rather limp US close on Friday and the JPY has taken back some of the lost territory vs. especially the pound sterling. Speaking of stock markets around the world, it is interesting to note that the Shanghai composite has had a rough going over the last several sessions and that many of the EM currencies are also finding it tougher to move stronger against the "safer" USD and Euro. So despite signs of continued optimism in some of the biggest markets, there are signs that risk appetite is waning a bit at the fringes of the market.
A very interesting article from Bloomberg today has China accusing Australia's Rio Tinto of "spying" and costing Chinese steel producers some $100+ billion over a 10-year period. It is a bit surprising that the story has not weighed more on the Aussie, as one can only wonder if any follow up move by the Chinese authorities down the road could have them bullying Australian companies in some way or even sanctioning them. China is set to release a raft of data tonight. It is becoming consensus knowledge that the Chinese numbers are fiction, so it is far more interesting to see how the markets react to the data than it will be to read the data and try to glean anything from it.
With last week's last day providing a very interesting pivot point in the market, it makes this week critical for the follow up action. The USD seems to have pivoted to the strong side and could be at least set for at least a consolidation to the strong side. The JPY was very weak on Friday, but it has been extremely rare to see, for example, a falling EURUSD and rising EURJPY simultaneously for any extended period of time, so the JPY will bear a good deal of watching, especially at this Wednesday's FOMC meeting and release of the new monetary policy statement. Has the BoE set the example by insisting on a very cautious stance and even expanding the QE programs as data has shown signs of recovery, comfortable in the face of enormous slack in capacity utilization and employment?
Any shock to the upside in bonds (fall in yields) this week as the 10-year yield approaches the critical 4% level - something the Fed probably eyes with extreme distaste unless it is buying what the green shootists are selling - could see the JPY pivot quickly back to the strong side. The JPY has been a tough nut to crack lately. The last time it had anything approaching as poor a performance as it saw on Friday, it marked a bottom and the JPY appreciated strongly for four or five weeks.
Chart: EURUSDA look at the weekly EURUSD chart shows the strong reversal from the attempt to new highs since the December spike. This sets up expectations for a try back lower to the lower end of the previous range. The first stress test comes with the rising trendline and then the more significant structural support in the 1.3750 area defined by an old high and retest combination (the orange flatline below). The 40-week (200-day) moving average is not in play anytime soon, but will rise rapidly in coming weeks.

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FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.
Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.
Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.
Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.
This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).
Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.