Traders continued to punish the greenback following yesterday¡¯s unprecedented rate cut by the FOMC to lower its key interest rate to a target range of 0 to 0.25%. The dollar plunged to a fresh 13-year low against the yen at 87.16 and a new two-month low versus the euro, losing nearly 5-big figures for its largest one-day decline to 1.4437.
With the Japanese currency trading at its highest level in over a decade, markets will remain vigilant against possibly BoJ intervention. Government officials have offered conflicting sentiments with Chief Cabinet Secretary Kawamura expressing his desire for the Bank to Japan to take appropriate action to stem the currency¡¯s sharp gains. However, Japan¡¯s Finance Minister Nakagawa said intervening in the currency market was not a consideration at this point, suggesting the movements had not been too sharp. With trading volume likely to wind down over the coming holidays, we would not rule out the possibility for the Bank of Japan to step in during thinly traded markets to quickly move the dollar/yen pair back toward the 100-level.
The dollar breached through several key support levels against the majors, suggesting the sell-off may pick up steam over the coming sessions. With thin markets expected over the coming weeks, we anticipate heightened volatility that could possibly send the euro toward 1.4865.
Wednesday, February 25, 2009
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Forex Trading - Currency Trading
The "Forex"is the abbreviated form of Foreign Exchange; it is also referred as the "Spot FX" market. In Forex trading, the currency of one nation is traded for that of another. Therefore, Forex trading is always traded in currency pairs. The most commonly traded currency pairs are traded against the US Dollar (USD). The major currency pairs are the Euro Dollar (EUR/USD); the British Pound (GBP/USD); the Japanese Yen (USD/JPY) and the Swiss Franc (USD/CHF).
Forex Trading
For whatever reason, US interest rates at the front of the curve have rallied sharply over the last couple of days from a low close to 60 bps last week. The US yield curve is flattening as yields at the long end of the curve were crushed over the last few weeks as Bernanke's promise to move into new hyper-expansive territory saw a massive rally in long bonds. Meanwhile, the German 2-year rates continue to fall, such that the German/US 2-year spread now stands at around 90 bps. This matches the lowest level of that spread since late October when the deleveraging panic has EURUSD probing below 1.2500. And yet here we stand at 1.4000. Another interesting development in recent weeks is that the German yield curve is steepening sharply over the last two weeks while the US yield curve has flattened - a highly unusual divergence that reflects the fact that the Fed has essentially reached the zero bound at the shortest end of the curve while the ECB still has a bit more room for stimulus via the rate mechanism (another 100 bps drop on the German 2-year seems reasonable in the coming months, which would drop the German/US spread to zero. The last time it was at zero was back in October of 2007, when EURUSD was trading around current levels. This shows that while the direction of the spread can be an interesting signal in the short term (theoretically pressuring EURUSD lower from here), its absolute level doesn't seem to have much significance in the bigger picture.
USDCAD continues to push up against its 55-day moving average, which it has been doing for the last 5 days in a row without being able to close above it after dropping below early last week. The freefall in energy prices continues, with the February contract already having fallen 10 dollars from the highs early last week. This could continue to keep CAD on the ropes, though again, the pair needs to work its way back above 1.2300 and even 1.2500 to get out from under the shadow of the latest steep sell-off.
GBP got whacked again yesterday by dovish comments from a BOE official, this time Gieve, the departing BOE deputy governor. He admitted that the bank failed to understand the seriousness of the crisis (admirable honesty, as few did...) He also stated that rates are a "blunt instrument" for managing the situation and argued for "new instruments which sit somewhere between interest rates...and individual supervision and regulation of individual banks." The market's interpretation of this is that the Bank is leaning toward the US Fed's model for dealing with the problem (hyper-expansive monetary policy, etc...), which could lead to a further pound devaluation. We think the pound is beginning to get a bit cheap vs. the Euro in the big picture, even as many are begin to call for parity. We suspect that EUR will be one of the big losers in the early part of the coming year if not for the full calendar year, as the market has failed to price in the EuroZone's potential for further weakness. Technically, we're not there yet for a EURGBP short, but options are always an option....
Equities did crumble through short term support after trading heavy recently, but the sell-off so far doesn't look like a capitulation and we have to wonder about the potential for much volatility over the next couple of days in equities with holiday trading more or less the rule until the New Year since Christmas and New Years fall in the middle of the week. If equities try to find a little holiday cheer, we might expect USDJPY to continue to drift toward 91.00 and even higher as that pair still has plenty of room to continue to consolidate the recent sell-off. USDJPY managed to rise despite yesterday's equity sell-off.
As always, beware that poor market liquidity can result in exaggerated moves if enough participants have a bone to pick, so we must remain on guard, especially in currencies with end of the month/year fixing and the low liquidity. EURUSD may remain capped around 1.4000/1.4100 for now, with support coming in at the recent 1.3830 low area and then possibly 1.3720, the 100-day moving average.
USDCAD continues to push up against its 55-day moving average, which it has been doing for the last 5 days in a row without being able to close above it after dropping below early last week. The freefall in energy prices continues, with the February contract already having fallen 10 dollars from the highs early last week. This could continue to keep CAD on the ropes, though again, the pair needs to work its way back above 1.2300 and even 1.2500 to get out from under the shadow of the latest steep sell-off.
GBP got whacked again yesterday by dovish comments from a BOE official, this time Gieve, the departing BOE deputy governor. He admitted that the bank failed to understand the seriousness of the crisis (admirable honesty, as few did...) He also stated that rates are a "blunt instrument" for managing the situation and argued for "new instruments which sit somewhere between interest rates...and individual supervision and regulation of individual banks." The market's interpretation of this is that the Bank is leaning toward the US Fed's model for dealing with the problem (hyper-expansive monetary policy, etc...), which could lead to a further pound devaluation. We think the pound is beginning to get a bit cheap vs. the Euro in the big picture, even as many are begin to call for parity. We suspect that EUR will be one of the big losers in the early part of the coming year if not for the full calendar year, as the market has failed to price in the EuroZone's potential for further weakness. Technically, we're not there yet for a EURGBP short, but options are always an option....
Equities did crumble through short term support after trading heavy recently, but the sell-off so far doesn't look like a capitulation and we have to wonder about the potential for much volatility over the next couple of days in equities with holiday trading more or less the rule until the New Year since Christmas and New Years fall in the middle of the week. If equities try to find a little holiday cheer, we might expect USDJPY to continue to drift toward 91.00 and even higher as that pair still has plenty of room to continue to consolidate the recent sell-off. USDJPY managed to rise despite yesterday's equity sell-off.
As always, beware that poor market liquidity can result in exaggerated moves if enough participants have a bone to pick, so we must remain on guard, especially in currencies with end of the month/year fixing and the low liquidity. EURUSD may remain capped around 1.4000/1.4100 for now, with support coming in at the recent 1.3830 low area and then possibly 1.3720, the 100-day moving average.
Currency market
Contracts on Forex market within the IFC Markets are performed due to SPOT conditions. A spot transaction is a straightforward (or outright) exchange of one currency for another. The spot rate is the current market price or 'cash' rate. Spot transactions do not require immediate settlement, or payment 'on the spot'. By convention, the settlement date, or value date, is the second business day after the deal date on which the transaction is made by the two parties.
Posted by Obaid Ur Rehman.
Posted by Obaid Ur Rehman.
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FX Instructor, LLC is a US-based forex education company specializing in world class forex education based on the MetaTrader 4 platform, in our real-time Live Trading Room.
* See our charts, hear our voice, and ask questions while the market moves
* Observe us analyzing the market, opening positions, and managing trades
* Learn "best practices" for trading through our own example
* Acquire powerful new strategies and skills
* Learn to approach the market with discipline and patience
* Trade together with a global community of fellow traders
* Access a vast library of lessons, videos, and tutorials
*FX Instructor is the recommended trading school for all traders of FXOpen.*
Attending the Live Trading Room is beneficial for traders of all levels, no matter how big your account or experience - and it costs just $24.95 a month, with a 100% Satisfaction Guarantee.
This is quite possibly the best investment ever made by traders who becomes a member of our Live Trading Room community. To take advantage of the Live Trading Room
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