Forex:ECB: Rates to Remain Steady by Angelo Airaghi

ECB: Rates to Remain Steady by Angelo Airaghi
[Guest Analyst] 10/5/2009(www.forexnews.com)

The unemployment rate remains high in the U.S and in Europe and could rise further over the short term. However, new orders are improving and a turnaround might be near. The European Central Bank (ECB) meets this week in Venice (Italy). Rates should remain steady, although an exit strategy for next year could be ready.

U.S.: Home prices to increase.
The U.S. economy is slowly moving out of the deep recession of the past two years, albeit the data remains volatile and unstable. Ups and downs are normal during turning points. Some sectors perform better than others, but an equilibrium should emerge as time passes by. The manufacturing industry, as an example, is performing again, since exports to major economies are increasing. In reality, the U.S. manufacturing ISM index declined to 52.6 in September, but it remains above the benchmark of 50 for the second straight month. In fact, 13 out of 18 industries registered some gains and improvements are broad-based among various economic sectors. The housing market remains nevertheless the leading force. Home inventories are declining and prices are beginning to rise. Current affordability and tax incentives are driving the market and the trend should continue in the coming months as well. However, the move could be subdued by the new saving mentality which focuses on reducing debt and improve personal finances.

In fact, the job market stays uncertain. In September, it shed another 263,000 jobs (-170,000 expected). The unemployment rate is now at 9.8% (the highest level of the past 26 years) from 9.7% in August. Nevertheless, the average monthly decline of the third quarter remains mild compared to the previous two quarters and part-time jobs are stabilizing. Consumers are still skeptical about current conditions and labor market prospective. Consumer confidence fell to 53.1 in September from 54.5 in August, but the index is way above the low of 25.3 registered in February. In effect, personal consumer spending rose 1.3% in August (+1.0% expected) on the top of July’s gain of 0.3%, marking the largest gain since October 2001. Both, durable and non-durable sales rose. However the cash-for-clunkers incentive program had an important role in August data (durable goods rose 5.3%) and numbers should again be checked in future to confirm the validity.

EUROPE: New orders rising.

Business and consumer confidence continue to improve in Europe, even though spending should remain mild for now, since the unemployment rate is at the highest level. In September, the Euro zone economic sentiment index moved up to 82.8 from 80.8 in August. However, the consumer confidence index stays negative at -19 from -22, as household finances remain tight. The Euro zone unemployment rate rose to 9.6% in August from 9.5% in July and 7.6% in August of 2008. There are now more than 15 million people without work in the 16 nations using the Euro and the trend might continue for the short term. Nevertheless, new orders are improving and a turnaround might be near, despite the domestic demand remaining weak. In fact, while export receipts hit a seven month high, imports fell to a four year low. With inflation low and growth still sluggish, the European Central Bank (ECB) should keep rates steady until the first part of next year. However, an exist strategy might be ready.

In September, the final Purchasing Manager’s Index for the manufacturing sector moved to 49.3 from 48.2 in August. It has been the second consecutive month of increase and the largest move since May. The output rose in France, Germany and the Italy. In Germany, the PMI reached 13 month high, although it still remains below the key benchmark of 50. The largest economy in Europe is moving out of the recession, but the recovery is bumpy and more work needs to be done. The German unemployment rate fell in September to 8.0% from 8.3%. Nonetheless, the decline might only have been inspired by seasonal factors. The job market is one of the greatest challenges for the Christian Democrat that won the general elections last week. Before cutting taxes, Chancellor Angela Merkel would possibly focus on reducing the huge federal deficit, which might be around 4.0% of the GDP next year.

Forex: The Value of Trade Balance to Local Economy

The balance of trade also referred as trade balance, which sometimes is symbolized as NX, is the difference of the monetary value of imports and exports in one economy in a given period of time. The balance of trade is considered the biggest part of a country’s balance of payments.

Imports, domestic spending, foreign aid, and investment abroad are called debit items while credit items includes exports, foreign investments in domestic economy and foreign spending in domestic economy.

A trade surplus is a positive balance of trade which is consists of more exporting than importing. A trade deficit is the negative balance of trade or sometimes called a trade gap. The trade balance can sometimes be divided as services balance and goods balance just like in the United Kingdom which they use the terms invisible and visible balance.

The balance of trade is a part of current account which includes transactions that includes income derived from international investment and international aid. Thus, if the current account comes as a surplus then the nation’s international net asset increases also while deficit will decrease the international net asset.

A good trade surplus is achieved when a country exports products more than buying imported goods. A trade deficit is eventually experience as a result of the opposite of a trade surplus. The trade balance is alike to the difference of a country's output and the domestic demand. These factors may affect the trade balance: prices of goods manufactured, taxes and tariffs, trade agreements, business cycle (home or abroad), and exchange rates.

The trade balance is different in many business cycles. For instance, export growth like oil and industrial goods which improves when there is economic expansion.

In developed countries like; Japan, China and Germany usually run at trade surpluses in which they experience a higher savings rate. Around the world there are different natural resources which a country may have for instance, countries from the coastal regions are major producers of fish, Canada can be a major producer of lumber because of its huge forests while in the Middle East, has the most oil reserves.

International trade is important so in order to sustain the balance of trade. A country should be totally self sufficient without international trade. Through international trades, each country will have the opportunity to produce specialize goods efficiently. In relation, when a nation specializes in producing these goods, the total production increases instead of trying to be self sufficient. Nations will benefit from international trades and also meets their needs. Generally, nations will trade to other nations when they gain from the trade. But the gains are not usually equal in terms of benefits and profit.

Forex: What is a Transaction Cost and How to Calculate It?

In economics, transaction costs are the rate acquired when making an economic exchange. This costs incurred when buying or selling securities or stocks. This is also referred as transaction fees. Transaction costs also comprise of brokers’ commissions ad spreads (difference between the price that the dealer paid for a security and the price it may be sold. This is what the broker or bank produce for being a middleman in a transaction.

For instance, most people when buying or selling a security or stock, pays a commission to their broker and that commission can be considered as the fee or transaction cost for doing that stock deal. When evaluating a potential transaction, it is crucial to think about these costs that might prove significant. Mostly, in financial markets, the initial cost for these transactions is commission which is paid to brokers upon trade execution. This costs becomes increasingly important the shorter the holding time of an investment.

Many market models disregard transactional costs, presumptuous instead those markets are non resistant. While this thought is invalid, for many applications such costs are low enough that they can be disregarded. The lesser the cost for a transaction, the more effective and competent a market is said to be. The Foreign exchange market and stock market have lower costs for such transactions of any major asset class.

It is considered to be much more cost- efficient to trade in Forex in terms of both commissions and transaction fees. An online website for example charges no fees or commissions and at the same time offer traders an access to all relevant market information and trading tools. On the contrary, online stock trade commission ranges from $7.95 - $ 29.95 per trade and up to $100 or more per trade with full service brokers.

Another thing to consider, which is an important point is the width of the bid / ask spread. Regardless of the deal size, foreign exchange dealing spreads are normally or common in 3-4 pips (anyway a pip is .0001 US cents) in the major currencies. Generally, the width of the spread in a foreign exchange market transaction is less than one tenth (1/10) that of a stock transaction, which could contain a .125 or one eight (1/8) wide spread.

Since transaction costs are paid via bid/ask spread, there has to be no charges to trade or hidden fees. There are instances that there would be extra charges asked by good brokers for some non compulsory services or access to particular reports. A smaller spread is visibly better. Since brokers are taking the other side of all the customer trades, brokers gain profit by making the spread between the bid and offer prices. You may find that find spreads vary by broker.

In order to be successful in trading on the foreign exchange market, you have to find a good broker.

Forex articles: How Interest Rates Play a Role in the Currency Markets

Interest rates play the foremost important role in moving the prices of currencies in the Forex market. As the institutions that set interest rates, central banks are therefore the most influential factors. Interest rates dictate flows of investment. Since the currencies are representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the Forex market to experience movement and volatility. In the realm of Forex trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.

An increase in interest rates encourages traders to invest within that market and causes the demand for the currency to rise. As demand rises, the currency becomes scarcer and consequently more valuable. Investors are drawn to the currency, causing it to appreciate, because they will gain a higher yield on their investments, as in the Jane example. In order to purchase the country's assets (stocks or bonds), Jane will have to convert her domestic currency to the target country's currency also increasing demand. Conversely, a fall in interest rates discourage investors from purchasing assets in that particular economy, as the return on their investment is now smaller. The economy's currency will depreciate as a result of the weaker demand.

Forex: U.S.: Unemployment’s Rate is the Achilles Heel

As housing is giving some relief to household pockets, the Federal Reserve warns about a slow recovery. The Euro, in the mean time, is testing key resistance levels against the U.S. dollar.

U.S.: housing still supportive

Tangible signs of improvements are beginning to show up, albeit the recovery remains fragile in the United States. In July, the conference board index increased 0.6% month-on-month from + 0.8% in June. It was the fourth consecutive month of increase, giving further prove that the U.S. economy might have bottomed. In a speech at the Jackson Hole Symposium, Fed Chairman Bernanke confirmed that the worst might be over for global economies, thus indirectly anticipating a safe-haven demand’s decline for U.S. dollars and Treasuries in the coming months. Nonetheless, the Federal Reserve will keep rates low for the first part of 2010 with inflation so mild. In July, the producer price index (PPI) fell 0.9% versus the expected -0.4%. In reality, after two months of gains, 6.5% in June and 15% in May, housing starts slid by 1.0% in July to 581,000 annualized (+2.5% expected). Nevertheless, singles component (three-quarters of the market) rose 1.7%, while multiple houses declined 13.3%. Starts are still above the average of the first three months of the year, although away from the over 2 million produced in 2005.

Existing home sales increased at the contrary by 7.2% (+2.0% expected) to 5.24 million in July from 4.89 million in June. Inventories remained unchanged at 9.4 months of supply. However, both single homes and condos improved. The first climbed by 6.5% and the second by 12.5%. Clearly, the first-time homebuyers tax credit program, which allows first time buyers to receive a refundable credit of USD 8.000.-. (10% of the home value, if lower) until December 1st, have helped home sales. Nonetheless, the positive domino’s effect created by the activity in the housing sectors could continue in the future as well supported by low interest rates and affordable prices. Home ownership remains an American dream. Consequently, a bipartisan group of U.S. senators are requesting that the tax credit program to be renewed for an extensive period of time.

Is the German’s recovery sustainable?
The decrease of inventories and the rise of exports, the European trade balance registered a surplus of Euro 4.6 million in June from Euro 2.1 billion in May, are helping the European economy out of the recession. This is what stands out from the latest data, albeit the recovery might be slow and fragmented. In effect, after improving for six straight months since February, the Euro zone composite Purchasing Manager’s Index finally climbed to the critical level of 50 in August. The manufacturing sector printed 47.9 from 46.3, while the services PMI showed 49.5 from 45.7. In Germany, the composite index was 54.2 in August from 49.0 in July, the highest level in more than one year. In France, it rose instead to 50.9.

The Euro zone Gross Domestic Product (GDP) declined only an estimate of 0.1% in the second quarter from the 2.5%, while in Germany and France, the GDP increased 0.3%. The German’s economic sentiment index from the ZEW center of Economic Research climbed to 56.1 in August, way above the average of 26.5. However the current economic situation index, which rose only to -82.1 points, testifies how Germans remain prudent over the health of the economy. In fact, the European Central Bank is warning that the German rebound might have been exacerbated by the economic measures introduced this year and could not be sustainable over the short term. As a result, ECB will keep rates low for now, the Producer Price Index (PPI) fell almost 8.0% year-on-year in July, and might increase them again once the economic momentum will trend higher.

EUR/USD: Testing key resistance lines.
EUR/USD: The Euro is again at crucial technical levels. A move above 1.4560 would target 1.4620, 1.4740. A decline below 1.3750 is instead necessary for 1.3550.
GBP/USD: A move below 1.6125 would target 1.6020. A breakout above 1.6820 would take the price to 1.6880.
USD/JPY: The market is trading between 98.00 and 92.00. A move above 95.40 could target 96.00. A decline below 92.30 could instead take to price to 91.70.
USD/CAD: The US dollar finds support at 1.06. The resistance is instead at 1.1050.


by Angelo Airaghi [Guest Analyst]
8/26/2009