20th of October 2010 - Forex Market Overview

DAILY Fundamental Forex Market Overview
20 October 2010 – 8:00 GMT
Wednesday

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Market Analysis Desk
Foreign Exchange Research: www.fibosignals.com/5585/resources.html
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FUNDAMENTAL ANALYSIS at 0800 GMT

USD

Risk appetite finally stabilized during the Asia session in the aftermath of yesterday's surprise policy hike by China. EURUSD traded 1.3698-1.3811, USDJPY 81.32-81.67. The dollar has been slowly giving back yesterday's gains ever since Shanghai equities opened and quickly recovered their poise. Although several Fed officials spoke, there was little market impact given that many of their views on further easing were already known. Fed Presidents Evans, Dudley and Lockhart continued to support further easing while Fisher and Kocherlakota continued to sound caution on more action. Lockhart, a 2011 FOMC alternate and 2012 voter, mentioned a pace of $100 bn of purchases a month is among the range of considerations. Chairman Bernanke did not offer any new insights. Fed Governor Duke reminded markets that a further round of easing on Nov. 3 is not yet a done deal, and that lowering the interest rate paid on excess reserves is another policy option. Investors expectations for more easing remain in place but calibration of those expectations is key, as the quantity and duration of more easing are moving targets. Press reports that a large US asset manager and the New York Fed are looking to put-back bad mortgages to a major US bank contributed to the atmosphere of risk aversion earlier, and mixed data did little to help investor sentiment as housing starts were better than expected and housing permits fell more. Between now and the Nov. 3 FOMC meeting, we expect pressure to remain squarely on the dollar.

EUR

ECB Executive Board Member Stark noted that there are risks associated with the ECB's bond purchases, and that the ECB must avoid intervening in functioning markets. He said that the bond buying program risks becoming 'quasi fiscal' in nature, and that low interest rates reduce the incentive for fiscal consolidation. These comments bring Stark a little closer to ECB Governing Council Member Weber's stance on the matter, but for now Weber is the only policymaker who has publicly called for the program to be disbanded.

Stark added that he sees clear signs of normalization in money markets and cautioned that while there is no apparent currency war yet, there is the risk that ample liquidity could trigger more defensive responses. Weber said it is too early to call an end to the crisis, echoing Trichet's comments at the latest press conference, but his comments focused more on regulatory issues than monetary policy.

The German ZEW survey was much stronger than expected at 72.6. However, the boost to the euro was limited as markets continue to assess whether QE2 is now fully priced and reduced risk-seeking worked against the euro.

GBP

Broader dollar strength kept sterling under pressure but the currency has its own obstacles to come in the next 24 hours. The BoE MPC minutes should show if a 3-way split has occurred, with policymakers Posen and Sentence possibly on opposite ends of the policy spectrum, and headlines from the Comprehensive Spending Review will be watched as fiscal austerity could hamper growth and weigh on sterling.

BoE Governor King said monetary policy is still a potent weapon but that policy must balance risks to inflation and the MPC is conscious of risks to inflation expectations. He saw upside and downside risks to inflation though he did say it could be some time before inflation falls to target. King also said the weaker pound supports rebalancing of the economy and that the G7 willingness to work together "has ebbed." He also mentioned that M4, pay and demand growth are likely better guides to future inflation. M4 data is also due today.

JPY

BoJ Deputy Governor Nishimura observed that the yen's rise is a major downward risk to the economy, and that it may contribute to deflationary forces. IMF First Managing Director Lipsky met with Finance Minister Noda, and said that the BoJ's recent easing was a welcome move. Noda said that FX intervention was not discussed at the meeting. Deputy Cabinet Secretary Fukuyama said there has been no change in Japan's position on FX intervention.

Nishimura added that China's rate hike yesterday is a good decision that would help ensure long and stable growth.

CAD

The BoC kept its policy rate unchanged as expected and revised down its growth outlook for 2010 and 2011, also in line with expectations. But the decision to tune down inflation forecasts was less expected, as the BoC pushed back its time-frame for when it sees the output gap closing. The BoC kept in place its policy guidance, saying again that further reductions in monetary stimulus would have to be "carefully considered" and seemingly expanded its view of downside risks. With the BoC on hold for now, the CAD will continue to lose luster to the other dollar-bloc currencies as a relative value G10 play. The BoC Monetary Policy Report will be released and should echo the changes outlined in the policy statement.

A. White

Chief Analyst at Fibosignals.com

Analyzing the forex market

Proper analysis of factors of influence is one of the keys for success in trading. Two well-known analysis techniques are the technical and the fundamental analysis. Both techniques are applied on daily basis by sophisticated investors and institutions. Both techniques have the same target: to analyze an instrument or security to decide the action to take, but they use different approaches to arrive to one decision.

1. Fundamental Analysis
Fundamental trading strategies consist of macro, micro and firm-specific strategic assessments of where a currency, share or commodity should be trading based on virtually any criteria but the price action itself.

These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements or firm and industry specific criteria for shares and supply and demand situation and market events for commodities.

Fundamental analysis alone is often difficult to use when dealing with currencies, shares, commodities and other products. This is because fundamental analysis does not provide for specific entry and exit points, and therefore makes it difficult to control risk. On the other hand, fundamental analysis is based on realistic and empirical information (rational data) but beeing subjected to the subjective interpretation of the investors. That's reason why a combination with technical analysis is recommended.

2. Technical Analysis
Technical Analysis is probably the most common and famous means of making trading decisions and analyzing forex, equity and commodities markets.

Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action of the market, ignoring fundamental factors. As fundamental data can often provide only a long-term or "delayed" forecast of market movements based on empirical data, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.

Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell signals or to predict market direction. One of the most popular uses of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.

cheers!

AB

Controlling the risk of your Forex trading positions

Controlling risk is one of the most important factors of successful trading. While it is emotionally more appealing to focus on the upside of trading, every trader should know precisely how much he is willing to lose on each trade before cutting losses or ceasing trading and re-evaluating his strategy.

Trading financial instruments implies risks and depending on the instrument there could be also instrument-specific risks, that should be monitored or managed. Risk will essentially be controlled in three ways: 1) by exiting losing trades before losses exceed the pre-determined maximum tolerance (or "cutting losses"), 2) by limiting the "leverage" or position size you trade for a given account size, and 3) by keeping a good diversification of the structure of the investment portfolio.

1. Cutting Losses
Almost all successful trading strategies include a disciplined procedure for cutting losses. When a trader is down on a positions, many emotions often come into play, making it difficult to cut losses at the right level. The best practice is to decide where losses will be cut before a trade is even initiated. This will assure the trader of the maximum amount he can expect to lose on the trade.

The other key element of risk control is overall account risk. In other words, a trader should know before he begins his trading endeavor how much of his account he is willing to lose before ceasing trading and re-evaluating his strategy. If you open an account with $10,000, are you willing to lose all $10,000? $5,000? As with risk control on individual trades, the most important discipline is to decide on a level and stick with it.

2. Determining Position Size
Before beginning any trading program, an assessment should be made of the maximum account loss that is likely to occur over time, per position . For example, assume you have determined that your worse case loss on any trade is 30 pips. That translates into approximately $300 per $100,000 position size.

Further assume that the $100,000 position size is equal to one lot or contract. Five consecutive losing trades would result in a loss of $1,500 (5 x $300); a difficult period but not to be unexpected over the long run. For a $10,000 account trading one lot/contract, this translates into a 15% loss. Therefore, even though it may be possible to trade 5 lots/contracts or more with a $10,000 account, this analysis suggests that the resulting "drawdown" would be too great (75% or more of the account value would be wiped out).

3. Diversification
In order to reduce overall risk of an investment portfolio the diversification of the assets shall be improved. There are three strategies to reach this target: 1) spreading the portfolio among multiple investment vehicles, 2) varying the risk of securites by diversifying into different investment strategies, 3) varying securities by industry and/or geography.

special contribution of: Fibosignals.com

Trading on margin or leverage trading

Trading on the Forex market occurs with margin ie. geared or leveraged transactions. Leverage trading, or trading on margin, means that a trader is not required to put up the full current value of the position he wants to open. But there are some important distinctions between trading stocks on margin and trading Forex on margin.

When stocks trade on margin, the leverage ratios are in the range of 2:1 or 4:1 – meaning a trader would only have to deposit $10,000 to the trader’s account in order to trade stocks worth $20,000 or $40,000 respectively. However, this kind of leverage requires the stock trader to be approved for “credit” for the amount invested that is in excess of what is deposited. Moreover, if the value of the stocks falls to a certain level, a stock trader trading on margin may have to pay additional funds than originally deposited to cover the losses.

Forex trading offers more leverage than stocks or futures - up to 200 or 400 times the value of the deposited funds in the Forex trading account. Therefore, at 400:1 leverage, a trader need only put up $25 to trade $10,000 worth of a currency. However, unlike trading in stocks, Forex traders do not need credit approval to trade on margin. If the value of the Forex positions falls to a certain level, your broker will close out (ie. liquidate) all positions so that the trader will never lose more money than initially deposited in the currency trading account.

Keep in mind: that increased leverage increases both a trader's opportunity and risk. For example, at 400:1 leverage, a change of 1% in the underlying value of the trade will result in a gain or loss of 400% on the underlying deposit. So you have to setup a well defined strategy to take profits and cut losses before entering a transaction.

Regards,

A. Black

Foreing Exchange Market and Forex-Quotes

Foreign Exchange: it is also known as FX or Forex. It is the buying and selling of currencies. Unlike stocks or futures, there is no centralized exchange for Forex. All transactions happen via phone or electronic network. Because of this, Forex is among the most liquid of trading instruments. In fact, the daily trading volume of currencies is $ 3.2 Trillion – which is more than all other world market exchange trading combined!

More than 85% of Forex trading volume occurs in the “Major” currencies: US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

Reading a foreign exchange quote is simple if you remember two things:

1. The first currency listed is the base currency
2. The value of the base currency is always 1

A currency pair quote is comprised of a bid/ask price expressed in the following format:

EUR/USD: 1.3036 / 1.3038 or EUR/USD: 1.3036/38

The first number in the series represents the bid price, the cost of selling the Euro against the Dollar, or going ‘short' on the Euro. The second number represents the ask price, the cost of buying the Euro against the dollar, or going ‘long’ on the Euro.

The difference between the ask price and the bid price is called the pip spread.

A pip (or “percentage in point”) is the smallest unit of measure for any currency. In most currencies, this is the fourth digit after the decimal point and is equal to 1/100th of 1% or .0001 (or .01 for Japanese Yen as the only exception among the major currencies). So, using the example above (EUR/USD: 1.3036 1.3038), the spread is 2 pips (38 – 36).

AB