All About the Majors: EUR/USD
Making headlines around the globe, the EUR/USD is perhaps the best known pair in the world! For the past 3 years it's been making high after high, but a reversal could send the price plummeting! In the meantime, it provides plenty of trading opportunity as it ranges between extended breakouts.
The euro has been called the "anti-dollar" since it is highly sensitive to US data. Because the recovery in the US has been uncertain, the market closely watches developments in the US economy to determine the strength of the recovery. Fears that the US is hitting a "soft patch" in its economic growth generally boost the euro.
Though the EUR/USD actively trades 24-hours a day, the most action is concentrated in the time when the US and European banking hours overlap, from 7:00 AM EST to 10:00 AM EST. Of all the majors, this pair best reflects how the US economy is doing compared to the rest of the world.
What moves EUR/USD?
Surprises in US economic releases This pair is hypersensitive to US data and will move when results come as a surprise- especially indicators that measure growth or recovery in the US.
Talk of Euro as an alternative reserve currency Because the US dollar is held as a reserve currency by many banks around the world, a diversification into euros would drive the value of the euro up causing a sharp move in the pair.
Interest rate differentials As the Fed raises interest rates, money will flow into the US as investors move to capitalize on these higher returns, boosting the value of the dollar.
Trade Deficit Because the imbalance of more imports vs. exports has the potential to reduce the value of the dollar in the long run, the market is very concerned with the trade balance in the US. Changes can cause a big shift in the value of the US dollar.
Fundamentals to Watch
FOMC Rate Decisions Watched closely since any increases in the interest rate automatically bring in foreign capital, increasing the value of the dollar.
US Non Farm Payrolls Amid fears of a "jobless recovery," the market has become very sensitive to this indicator, which measures new jobs created in the US.
U.S. Current Account...
US Trade Balance A measure of how much the US exports compared to how much it imports. To many net imports can drive the value of the dollar down, since more capital is leaving the US and being sold abroad, which drives down the value of the dollar.
US TIC Data Treasury Inflow Capital is a measure of how much foreign buying of US securities is happening. This can offset an imbalance of too many imports, since money is coming to the US to purchase goods which drives the value of the dollar back up.
US Retail Sales The US economy is largely driven by consumer demand. If this number is unhealthy, it can indicate a decline.
FOMC Minutes The breakdown of Federal Open Market Committee meetings. Scoured for any clues about how the Fed perceives the state of the Economy. Since the Fed makes interest rate decisions, insight into their outlook can help the market predict the interest rate outlook.
European GDP Gross domestic product. A measurement of output, and more importantly, growth in an economy.
European Trade Balance A measure of how much Europe is importing versus how much it exports. Too many imports mean that the currency will get weaker because more Euros are being sold to purchase foreign goods.
European CPI Consumer price index, a measure of inflation in Europe. Inflation that is too high or too low may prompt Europe’s central bank to raise or lower interest rates.
ECB Rate Decision Refers to the European Central Bank’s monetary policy. If inflation is too high, the ECB will raise interest rates to slow borrowing and spending. If economic growth is sluggish, lowering interest rates will help boost activity. High interest rates make a currency more attractive.
IFO Business Climate Survey Acts as an early indicator for economic development in Germany, which is Europe’s largest economy. Measure of sentiment that is weighted by industry to provide a composite outlook.
German Unemployment As Europe’s largest economy, German unemployment is read as a gauge of economic conditions in the Euro zone as a whole.
US News Ranking:-
| NEWS CATEGORY | TARGET | STOPLOSS | | 1. NonFarm Payroll USA | 100 | 30 | | 2. FOMC Release. | 100 | 40 | | 3. Durrable Good | 45 | 25 | | 4. Bussines Inventories. | 45 | 25 | | 5. Initial Jobles Claim. | 45 | 25 | | 6. Trade Balance. | 60 | 35 | | 7. PPI USA | 60 | 35 | | 8. Personal Income | 60 | 25 | | 9. Consumer Confidence | 60 | 35 | | 10. Consumer Price Index | 45 | 35 | | 11. Chicago PMI | 60 | 35 | | 12. Factory Order/Inventoris | 70 | 35 | | 13. Whosale Sales/inventoris | 40 | 25 | | 14. Univ Michigan Survey | 30 | 20 | | 15. Home Sales | 30 | 20 | | 16. ISM Manufacturers | 70 | 30 | | 17. GDP |
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| 90 | 30 |
All About the Majors: GBP/USD
The GBP/USD, also called the cable, is by far the most volatile pair of all the majors. Prone to huge breakouts and dramatic reversals, the pair can move uninterrupted for hundreds of pips, providing multiple opportunities to traders in all time frames.
When the US lowered interest rates, the GBP/USD became a hot carry trade – especially when the housing bubble in the UK prompted the Bank of England to raise UK interest rates further. However, this is becoming less the case with every rate hike out of the US – making the pair extremely sensitive to any changes in the interest rate outlook for either country.
The volatile pair trades most actively from London open until lunchtime in the UK (around 4:30 AM EST) and then during early US trading session (7AM to 10 AM EST). It can often travel 150-200 pips a day.
HOT Buttons: What moves GBP/USD?
Shifts in monetary outlook for the GBP Since the GBP is held by many in carry trades, this pair is very sensitive to any changes in interest rate outlooks.
UK housing market The UK housing market is the Bank of England’s top gauge for inflation in the UK. The housing bubble prompted a series of rate hikes, and new developments are closely monitored by the market.
US economic data The market is very sensitive to the outlook for the US economy, since recovery has been uncertain. A pickup can have implications for the US interest rate outlook, which could also affect the value of the GBP/USD.
Fundamentals to Watch
FOMC Rate Decisions Watched closely since any increases in the interest rate automatically bring in foreign capital, increasing the value of the dollar.
US Non Farm Payrolls Amid fears of a "jobless recovery," the market has become very sensitive to this indicator, which measures new jobs created in the US.
U.S. Current Account...
US Trade Balance A measure of how much the US exports compared to how much it imports. Too many net imports can drive the value of the dollar down, since more capital is leaving the US and being sold abroad, which drives down the value of the dollar.
US TIC Data Treasury Inflow Capital is a measure of how much foreign buying of US securities is happening. This can offset an imbalance of too many imports, since money is coming to the US to purchase goods which drives the value of the dollar back up.
US Retail Sales The US economy is largely driven by consumer demand. If this number is unhealthy, it can indicate a decline.
FOMC Minutes The breakdown of Federal Open Market Committee meetings. Scoured for any clues about how the Fed perceives the state of the Economy. Since the Fed makes interest rate decisions, insight into their outlook can help the market predict the interest rate outlook.
Bank of England Meeting Meeting at which Bank of England officials set monetary policy and decide whether to change interest rates or leave them the same.
UK Housing Prices The UK housing market is the number one gauge of inflation in the United Kingdom. It is closely watched since the Bank of England will raise rates if growth is too high.
UK Unemployment The UK economy is closely monitored for any changes. Unemployment is a good general indicator of the health of an economy.
UK Retail Sales figures provide a good indication of...
UK Inflation indicators are watched closely as they can...
All About the Majors: USD/CHF
Known increasingly as the "legacy pair" as trading activity moves from USD/CHF to EUR/CHF, the Swissy is the predominant safe haven currency in the world because of Switzerland’s long history of stability and neutrality. When the markets sense geopolitical turmoil, capital tends to move into Switzerland. Unexpected global events and spikes in the price of gold will create opportunities in this pair.
Because interest rates in Switzerland are so low, the CHF is also a popular funding currency for carry trades. Because growth in the Swiss economy has been slow for some time, many investors are entering into USD/CHF as a carry trade, making the pair extremely sensitive to any changes in the interest rate outlook for either the US or Switzerland.
USD/CHF is most active during European open hours (3 AM to 4:30 AM EST) through the early US trading session (7AM to 10 AM EST).
HOT Buttons: What moves USD/CHF?
Geopolitical tension: US-negative developments in the world will cause a move in the pair as investors move funds out of US dollars into "safe-haven" Swiss francs.
Gold prices Higher or lower gold prices will cause a corresponding move in the Swiss franc since the Swiss franc is one of the few world currencies that still is partly backed by gold.
SNB monetary policy Swiss monetary policy changes could have an effect on the standing of the CHF as a carry trade funding currency.
Fundamentals to Watch
FOMC Rate Decisions Watched closely since any increases in the interest rate automatically bring in foreign capital, increasing the value of the dollar.
US Non Farm Payrolls Amid fears of a "jobless recovery," the market has become very sensitive to this indicator, which measures new jobs created in the US.
US Current Account...
US Trade Balance A measure of how much the US exports compared to how much it imports. Too many net imports can drive the value of the dollar down, since more capital is leaving the US and being sold abroad, which drives down the value of the dollar.
US TIC Data Treasury Inflow Capital is a measure of how much foreign buying of US securities is happening. This can offset an imbalance of too many imports, since money is coming to the US to purchase goods which drives the value of the dollar back up.
US Retail Sales The US economy is largely driven by consumer demand. If this number is unhealthy, it can indicate a decline.
FOMC Minutes The breakdown of Federal Open Market Committee meetings. Scoured for any clues about how the Fed perceives the state of the Economy. Since the Fed makes interest rate decisions, insight into their outlook can help the market predict the interest rate outlook.
Swiss KoF Leading Indicators A composite of business surveys from various sectors of the economy (industry, retail and wholesale) that is combined to form a leading indicator that aims to project GDP growth approximately 8 months into the future.
Swiss CPI Consumer Price Index. A measure of inflation in Switzerland; a significant change may have implications for interest rate policy in Switzerland.
Comments from Swiss officials Watched for any indications of change in Swiss monetary policy.
Swiss GDP Gross Domestic Product. A measure of growth and productivity in the Swiss economy.
SNB Rate Decisions Any changes in the interest rate by the Swiss National Bank has implications for the pair as a carry trade.
All About the Majors: USD/JPY
The USD/JPY is an enigmatic pair that gives a good proxy of US versus Japanese strength. At the same time, the Bank of Japan works to keep the Yen weaker than perhaps it truly is, since a strong Yen would hurt Japan’s export sector by making its products more expensive.
Because interest rates in Switzerland are so low, the CHF is also a popular funding currency for carry trades. Because growth in the Swiss economy has been slow for some time, many investors are entering into USD/CHF as a carry trade, making the pair extremely sensitive to any changes in the interest rate outlook for either the US or Switzerland.
The USD/JPY is most active at the open of the Asian session (6 PM to 9 PM EST) as well as during the early US trading session (7 AM – 10 AM EST).
What moves USD/JPY?
Chinese Yuan: If China revalues its currency (thereby allowing it to become stronger and closer to its true value) then Japanese exports would be able to compete better in the US and China against Chinese products. If this happens, the Bank of Japan could then stop intervening in the market to keep the Yen weak, which would result in an increase in the value of the Yen
Oil prices Japan is highly dependent on imported oil. Higher oil prices can impede both production and growth in Japan as it makes input costs significantly more expensive.
Japanese reserve diversification Japan holds large reserves of US securities and currency. A diversification out of dollar only holdings could result in a large sell off in the US dollar, driving the price down.
Fundamentals to Watch
FOMC Rate Decisions Watched closely since any increases in the interest rate automatically bring in foreign capital, increasing the value of the dollar.
US Non Farm Payrolls Amid fears of a “jobless recovery,†the market has become very sensitive to this indicator, which measures new jobs created in the US.
U.S. Current Account...
US Trade Balance A measure of how much the US exports compared to how much it imports. To many net imports can drive the value of the dollar down, since more capital is leaving the US and being sold abroad, which drives down the value of the dollar.
US TIC Data Treasury Inflow Capital is a measure of how much foreign buying of US securities is happening. This can offset an imbalance of too many imports, since money is coming to the US to purchase goods which drives the value of the dollar back up.
US Retail Sales The US economy is largely driven by consumer demand. If this number is unhealthy, it can indicate a decline.
FOMC Minutes The breakdown of Federal Open Market Committee meetings. Scoured for any clues about how the Fed perceives the state of the Economy. Since the Fed makes interest rate decisions, insight into their outlook can help the market predict the interest rate outlook.
Japanese Inflation A measure of inflation in Japan. Closely monitored because when too high or too low, it can prompt a change in the interest rate outlook of a country.
Japanese Consumer Spending A measure of how much Japanese consumers are spending. The Japanese economy is driven primarily by its export sector, but consumer spending is an important gauge of economic activity and prosperity.
BoJ Monetary Policy Meeting When Japanese bank officials meet to determine monetary policy. Has direct implications for currency traders since they often hint at whether or not they intend to intervene to protect the Yen from becoming too expensive—hence making their exports more expensive.
Japanese Trade Balance Japanese imports vs. exports – the Japanese economy is highly dependent on exports; a drastic change in this number can have implications on the value of the Yen.
Japanese Industrial Production A measure of activity in the Japanese manufacturing sector. This acts as a gauge for the level of production and growth in the economy.
Tankan Survey A quarterly business survey gives a detailed assessment of Japanese business conditions. The headline number shows the difference between the proportion of optimistic businesses and the proportion of pessimistic businesses. A large positive number means that optimism pervades.
Summaries on FA:-
Fundamentals that determine the long-term strength or weakness in the major currencies include: -
Present and future government -
Economy and outlook -
Inflation and inflation target -
Current interest rates, anticipated changes -
Trade balance - is it a problem -
Current account - enough money flowing into the country -
Present and future government
How good a job the incumbent government is doing and how the people view the performance of its present government have a direct bearing on the exchange rate. Future changes in government, especially party changes are equally important. In the U.S. for example, the Democrats are generally viewed as a U.S. dollar negative because they tend to favor a weaker exchange rate; the idea is U.S. manufacturers will be more competitive and that will directly help the blue collar workers (Democrat’s voter base and election engine).
Economy and outlook (fall 2003)
The present state of the economy and perceived future outlook for the economy have a direct bearing on the exchange rate. The positive ramifications of a strong economy cannot be underestimated. There is clearly a domino effect. People are working and view the future optimistically. So they spend money. The companies are making money so they spend money. Tax revenues are good so the government is spending money. All this spending tends to make the economy stronger still, and so on. When the economy is weak and the outlook is negative the opposite reaction occurs.
Inflation and inflation target
Inflation has not been an issue this decade for any of the major countries. Deflation has been a problem for Japan and presently the United States is more concerned with deflation than inflation. Inflation outlook has changed because economies like the United States produce far less goods (prone to inflation) and much more services (practically no inflation risk). In fact better ways of servicing can lower costs and serve as a buffer.
Current interest rates, anticipated changes
The currencies of Australia, Canada and Great Britain have considerably higher interest rates than the United States, Japan, Switzerland and the Euro. The high interest rate currencies have what is known as a positive cost of carry when paired up against a low interest rate currency and that makes them especially attractive to investors. Positive cost of carry simply means the investor earns more interest on the currency bought than is paid on the currency sold. What oftentimes happens is that the high interest currencies are bought when the currencies are stable.
Trade Balance – is it a problem
A country has a positive trade balance when it exports more goods and services than it imports. When a country imports more than it exports it has a trade balance deficit. The United States has a huge trade deficit problem; each month it imports $40 billion more than it exports.
Most of the net U.S. trade deficit is with China and Japan. To correct this glaring imbalance the United States is pressuring China and to a lesser extent Japan to allow their currency to appreciate against the USD; this would make their goods less appealing to U.S. importers. A weaker USD would also help U.S. exporters sell their goods and services abroad.
Japan on the other hand has a trade surplus but that hasn’t stopped the Japanese government from officially intervening in the currency markets and buying 80 billion USDJPY this year. The U.S. up until recently has turned a blind eye on these perverse USD purchases. However, recent comments by Fed officials, the tone of the G7 communiqué, and comments from the International Monetary Fund (IMF), suggest a change in tactic on the part of the U.S. Specifically, it appears the U.S. wants a lower dollar.
Current account – enough money flowing into the country
The current account is simply net trade surplus or deficit. When foreigners were buying U.S. stocks with reckless abandon, the U.S. dollars leaving the country in net trade were working their way back through foreign purchases of U.S. stocks. That’s not happening anymore; in fact foreigners have been net sellers of U.S. for a long time now. What is happening is that China and Japan are taking all those trade dollars and buying U.S. government bonds. Problem with that is they have about 25% of all outstanding U.S. government debt; what it means is they could cause on a run on the dollar and or skyrocket U.S. interest rates if they sold a chunk over a short period of time.
Summary U.S. Fundamentals
Economy doing relatively well but the trade deficit, current account deficit, and budget deficit are all huge and getting worse. The U.S. dollar will end in tears unless something is done to correct these imbalances. U.S. dollar devaluation would help and is in the cards. Short USD is the only trade to be in these days.
source : actionforex,YeoMans. |
