Tuesday, June 30, 2009

FXstreet.com


Fxstreet.com (Barcelona) - After rebounding at 95.30, intra-day low, USD/JPY has begun to rise to trade above 95.50 and test the 95.70 resistance (EMA55 hourly chart), Dollar has eased some of its initial losses against the Yen, but currently is negative yet, falling 0.55% so far today from 96.15 opening price.Nicole Elliott, analyst at Mizuho Corporate Bank, comments: "Dipping below the lower edge of the relatively large Ichimoku ?cloud? and above the ?neckline? and moving averages suggest a short position. Maybe this week, certainly some time in July, we favour a test of the pivotal 94.00 area (and an eventual break below hereFXstreet.com (Barcelona) - The Pound has fallen further after the UK 1Q GDP worst than expected data and the pair has drop to levels below 1.6600, easing all of its previous gains. The pair has dropped from 1.6745, 8-month high, to post 1.6574 in the last minutes in a 200 pips decline movement. Currently the pair is trading around 1.6570/80.Carol Harmer, analyst at Charmer Charts.com, affirms that cable finally has broken higher: "However pullbacks currently look limited to 1.6665 and buyers will be waiting in the wings for this level so they can re-enter the market. If however the sellers decide further downward moves look likely they will bust through this support, leaving 1.6621/00 then exposed. However buyers will once more be waiting at these lower levels and this support is expected to hold."FXstreet.com (Barcelona) - European markets have turned mixed after opening higher in today's session as GDP collapse could ease the previous confidence on economic recovery. Oil and commodities are rising so far today, UK GDP has posted the biggest drop since 1958, a worse data than expected which has pushed the Sterling under pressure.Eurostoxx 50 is posting 0.16% gains, DAX Xetra rises 0.10%, IBEX 35 is 0.20% higher and CAC 40 advances 0.09% so far today, on the other hand, AEX declines 0.28% today. Oil barrel is rising 1.00% to climb above $72.00, Gold is trading around 941.50.United Kingdom has posted the biggest contraction since 1958, fueled by industries from construction to services. UK GDP has decreased 2.4% QoQ in the 1Q, worse than 2.1% drop market expectations and well below of 1.9% declines posted in the previous quarter. UK GDP has fallen 4.9% YoY in the first quarter, worse than 4.3% drop expected and 4.1% declines posted in the last quarter of 2008.Eurozone has posted the first negative reading in its preliminary CPI, with a 0.1% decline in June.GBP/USD has lost almost all of its initial gains and it is trading around 1.6600/10, 0.20% above today's opening price. GBP/JPY has fallen to 158.50 after rejecting from 160.30, currently the pair is trading around 159.10/20, 0.15% below today's opening price.EUR/USD has rebounded at 1.4080 and currently the pair is trading around 1.413040, 0.25% above today's opening price.Fxstreet.com (Barcelona) - After rebounding at 95.30, intra-day low, USD/JPY has begun to rise to trade above 95.50 and test the 95.70 resistance (EMA55 hourly chart), Dollar has eased some of its initial losses against the Yen, but currently is negative yet, falling 0.55% so far today from 96.15 opening price.Nicole Elliott, analyst at Mizuho Corporate Bank, comments: "Dipping below the lower edge of the relatively large Ichimoku ?cloud? and above the ?neckline? and moving averages suggest a short position. Maybe this week, certainly some time in July, we favour a test of the pivotal 94.00 area (and an eventual break below here)."

Monday, June 29, 2009

FOREIGN EXCHANGE

The foreign exchange market is unique because of
its trading volumes,
the extreme
liquidity
of the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 22:00
UTC
on Sunday until 22:00 UTC Friday),
the variety of factors that affect
exchange rates
.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of
leverage


Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
As such, it has been referred to as the market closest to the ideal
perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[2]
average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in
spot
transactions
$362 billion in
outright forwards

$1.714 trillion in
foreign exchange swaps

$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in
London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.[4] In addition to "traditional" turnover, $2.1 trillion was traded in derivatives
.
Exchange-traded FX
futures contracts were introduced in 1972 at the Chicago Mercantile Exchange
and are actively traded relative to most other futures contracts.
Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—
[1]; [2]
) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.
FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The
Wall Street Journal Europe
(5/5/06, p. 20).
Top 10 currency traders
[5]
% of overall volume, May 2008
Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues have made it easier for retail traders to trade in the foreign exchange market. In 2006, retail traders constituted over 2% of the whole FX market volumes with an average daily trade volume of over US$50-60 billion (see retail trading platforms).[6] Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. The ten most active traders account for almost 80% of trading volume, according to the 2008 Euromoney FX survey.[3] These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of base currency, which is a standard "lot".
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100/1.2300 for transfers, or say 1.2000/1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e., 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.

OFFICALLY

Officially established on December 27, 1945, when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management. The Fund commenced its financial operations on March 1, 1947. IMF approval was necessary for any change in exchange rates in excess of 10%. It advised countries on policies affecting the monetary system.

[edit
] Designing the IMF
The big question at the Bretton Woods conference with respect to the institution that would emerge as the IMF was the issue of future access to international
liquidity
and whether that source should be akin to a world central bank able to create new reserves at will or a more limited borrowing mechanism.

John Maynard Keynes (right) and Harry Dexter White
at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Georgia, U.S., March 8, 1946
Although attended by 44 nations, discussions at the conference were dominated by two rival plans developed by the United States and Britain. As the chief international economist at the U.S. Treasury in 1942–44, Harry Dexter White drafted the U.S. blueprint for international access to liquidity, which competed with the plan drafted for the British Treasury by Keynes. Overall, White's scheme tended to favor incentives designed to create price stability within the world's economies, while Keynes' wanted a system that encouraged economic growth.
At the time, gaps between the White and Keynes plans seemed enormous. Outlining the difficulty of creating a system that every nation could accept in his speech at the closing plenary session of the Bretton Woods conference on July 22, 1944, Keynes stated: \
We, the delegates of this Conference, Mr. President, have been trying to accomplish something very difficult to accomplish.[...] It has been our task to find a common measure, a common standard, a common rule acceptable to each and not irksome to any.
—
[9]
Keynes' proposals would have established a world reserve currency (which he thought might be called "bancor") administered by a central bank
vested with the possibility of creating money and with the authority to take actions on a much larger scale (understandable considering deflationary problems in Britain at the time).
In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary.
But the United States, as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, balked at Keynes' plan and did not pay serious attention to it. The U.S. contingent was too concerned about
inflationary
pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country.
Although compromise was reached on some points, because of the overwhelming economic and military power of the United States, the participants at Bretton Woods largely agreed on White's plan.

[edit
] Subscriptions and quotas
What emerged largely reflected U.S. preferences: a system of subscriptions and
quotas embedded in the IMF, which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country as opposed to a world central bank capable of creating money. The Fund was charged with managing various nations' trade deficits so that they would not produce currency devaluations
that would trigger a decline in imports.
The IMF was provided with a fund, composed of contributions of member countries in gold and their own currencies. The original quotas planned were to total $8.8 billion. When joining the IMF, members were assigned "
quotas
" reflecting their relative economic power, and, as a sort of credit deposit, were obliged to pay a "subscription" of an amount commensurate to the quota. The subscription was to be paid 25% in gold or currency convertible into gold (effectively the dollar, which was the only currency then still directly gold convertible for central banks) and 75% in the member's own currency.
Quota subscriptions were to form the largest source of money at the IMF's disposal. The IMF set out to use this money to grant loans to member countries with financial difficulties. Each member was then entitled to withdraw 25% of its quota immediately in case of payment problems. If this sum was insufficient, each nation in the system was also able to request loans for foreign currency.

[edit
] Financing trade deficits
In the event of a deficit in the
current account
, Fund members, when short of reserves, would be able to borrow foreign currency in amounts determined by the size of its quota. In other words, the higher the country's contribution was, the higher the sum of money it could borrow from the IMF.
Members were required to pay back debts within a period of 18 months to five years. In turn, the IMF embarked on setting up rules and procedures to keep a country from going too deeply into debt year after year. The Fund would exercise "surveillance" over other economies for the
U.S. Treasury
in return for its loans to prop up national currencies.
IMF loans were not comparable to loans issued by a conventional credit institution. Instead, they were effectively a chance to purchase a foreign currency with gold or the member's national currency.
The U.S.-backed IMF plan sought to end restrictions on the transfer of goods and services from one country to another, eliminate currency blocs, and lift currency exchange controls.
The IMF was designed to advance credits to countries with balance of payments deficits. Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates. This flexibility meant a member state would not have to induce a
depression to cut its national income down to such a low level that its imports would finally fall within its means. Thus, countries were to be spared the need to resort to the classical medicine of deflating themselves into drastic unemployment
when faced with chronic balance of payments deficits. Before the Second World War, European nations—particularly Britain—often resorted to this.
Moreover, the planners at Bretton Woods hoped that this would reduce the temptation of cash-poor nations to reduce capital outflow by restricting imports. In effect, the IMF extended Keynesian measures—government intervention to prop up demand and avoid recession—to protect the United States and the stronger economies from disruptions of international trade and growth.[
citation needed
]

[edit
] Changing the par value
The IMF sought to provide for occasional discontinuous exchange-rate adjustments (changing a member's par value) by international agreement. Member nations were permitted first to depreciate (or appreciate in opposite situations) their currencies by 10%. This tended to restore equilibrium in their trade by expanding their exports and contracting imports. This would be allowed only if there was a "fundamental disequilibrium". A decrease in the value of a country's money was called a "devaluation", while an increase in the value of the country's money was called a "
revaluation
".
It was envisioned that these changes in exchange rates would be quite rare. Regrettably, the notion of fundamental disequilibrium, though key to the operation of the par value system, was never spelled out in any detail—an omission that would eventually come back to haunt the regime in later years.

[edit
] IMF operations
Never before had international monetary cooperation been attempted on a permanent institutional basis. Even more groundbreaking was the decision to allocate voting rights among governments, not on a one-state one-vote basis, but rather in proportion to quotas. Since the United States was contributing the most, U.S. leadership was the key. Under the system of weighted voting, the United States exerted a preponderant influence on the IMF. The United States held one-third of all IMF quotas at the outset, enough on its own to veto all changes to the IMF Charter.
In addition, the IMF was based in Washington, D.C., and staffed mainly by U.S. economists. It regularly exchanged personnel with the U.S. Treasury. When the IMF began operations in 1946, President
Harry S. Truman named White as its first U.S. Executive Director. Since no Deputy Managing Director post had yet been created, White served occasionally as Acting Managing Director and generally played a highly influential role during the IMF's first year

US doller


As we draw nearer to this year’s half-way mark it is clear that reports of a V-shaped recovery back in March we’re greatly optimistic. The sheer complexity of the global economic crisis and it’s repercussions on business climate has greatly hampered the economy’s ability to right itself. The rapid cutting of interest rates, vast amounts of liquidity injections have central banks tackling deflationary fears. Initially the U.S was ahead of the curve, but as Europe remained headstrong on not cutting interest rates to desperate levels and Green shoots were emerging the EURUSD jumped 15% - culminating at 1.4337 on the 3rd of June. Since then risk aversion has crept back into the picture – slowing demand, dwindling sales and flurry of bankruptcies has exacerbated that fact. The EURUSD has traded a broad 1.3750 – 1.4150 range for the past month as the pair attempts to find direction. The broad scale wedge we saw earlier this year saw the pair break upwards at the beginning of May as stock markets rallied. European confidence came in better than expected this morning and is at it’s highest since November 2008. The indicator rose to 73.3 against the 70.2 may reading – adding signs that record low interest and stimulus measures in the EU is really helping the 16 nation region pull out of this recession. The BIS’ annual general meeting this weekend saw the emergence of talks between China and Brazil on how to bypass the dollar for trade between the two countries. The premise for this agreement is to limit the importance of the U.S dollar as the dominant global reserve currency, one analyst saying the substantial debt the U.S had incurred during the crisis that originated on it’s shores would be a “heavy burden on the dollar”. As a consequence the long-term outlook by major financial institutions has shifted – strong dollar in the short/medium term but definite dollar weakness as we pull clear of these current economic woes. Initial talk along these lines spoke of the IMF’s SDR replacing the dollar as a global reserve currency, now it seems the focus has shifted to limiting the dollars importance by favoring more direct swap methods.

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