Forex Trading Strategies for 2011

Forex is perhaps the best way to make oodles of money in the world currency market. Making money through Forex is much similar to making money through holding stocks. The strategies of the Forex market is highly in demand as more and more investors are plunging into the Forex investment market, shifting their bases from the stock and the bond market. If you’ve incurred credit card debts and you haven’t received a desirable result through debt settlement companies, make sure you try investing in the Forex market to earn money and utilize the proceeds in paying off debts.


No one can predict how the war of the currency will play themselves in 2011 but the investors playing with their luck by trading in the Forex market in 2011 need to keep their wits about them more than ever, this year. Though the elevated forex market volatility continues to imply on the major swings in the US dollar and other key pairs, yet there are some break out strategies that may be followed by the investors. Here are a bunch of some such successful strategies.

1. Learn the Forex scalping method: Forex scalping involves a process of fast opening and liquidation of currency positions. As the word ‘fast’ is relative, it refers to a time period of about maximum 3-5 minutes. The not-so-novice Forex scalpers maintain their currency positions for as less as one minute. Most Forex traders are of the opinion that as the Forex scalpers secure their positions for a less period of time than the regular traders, the time for market exposure is much shorter than that of a regular trader and hence they are much less exposed to the market risks. However, as a Forex beginner, you also need to be aware of the fact that the method of Forex scalping is not an efficient one for all types of traders. The scalpers do not prefer taking big risks as they are more willing to let go of greater opportunities in comparison to smaller gains.

2. Stay aware of the market cycles and currency trading: There is a direct proportional relation between the market cycles and the Forex currency trading system. The market cycle is nothing but the growth and contraction phases of the financial life. The market cycle is the primary thing that determines the economic trend and no trader can ever become successful without knowing the nature of the market cycles. As the supply of money is closely related to the value of the currency, the trend of the Forex market also responds to the movements of the currency market cycle.

3. How you can trade pegged currencies: If you’re an amateur investor in the Forex market, you also need to know about the pegged currency. A pegged currency is one where the value of the currency is matched to that of another asset. That asset may be a single currency or even a basket of currencies. The fixed trading rate of the currencies will be valued by the central banks and will be maintained throughout in order to preserve the economic stability. The simplicity and clarity of the fixed exchange rate system is the biggest benefit of pegged currency trading.

You can soon become a confident Forex trader by following the breakout strategies discussed above. Try identifying high profitability trading set ups so that you can make the most out of your Forex trading skills and earn an overwhelmingly large amount of easy cash. The string of profits will boost your confidence and enable you to maintain a good winning percentage.

Source: http://www.forexmachines.com/

Strategies for Trading Forex in 2011.

Interesting video from tradeartist. Source: http://www.youtube.com/watch?v=tv361k9S_D4
"People from all around the world keep telling me that they are so grateful for discovering Forex trading because it is the most ideal business in the world and enables some traders to make the world a better place through charity and philanthropy. Not just a home based business, Forex trading provides freedom of mobility. Using technical analysis and sound Forex trading strategies, a trader can enter and exit trades on currency pairs while travelling virtually anywhere in the world. You will be amazed when you compare this business wih any other business opportunity available. In terms of potential income it is virutally unmatched. And once you discover what really works in Forex trading you may develop a skill that creates income in any economic cycle for the rest of your life."

Canadian Dollar: Parity Vs Reality

After a stellar 2009, the Canadian Dollar (”Loonie”) has had a relatively lackluster 2010 against the Dollar, rising by only 3-4%. As the Loonie has inched (back) towards parity, it has encountered significant resistance. I think there is reason to believe that the currency has reached its limit, and that there are little prospects for further appreciation for at least the first half of 2011.
Everyone likes to think of the Canadian Dollar as a commodity currency, but I don’t think this is an accurate representation. Net energy exports account for only a small portion (2.9%) of Canadian GDP, a fraction which is dwarfed by the export of automobiles, for example. In fact, eastern Canada, which is comparatively poor in natural resources, is actually a net energy importer. I think that investors have largely come to the same conclusion, and significant rallies in oil and other commodity prices in the second half of 2010 spurred only a modest appreciation in the Loonie.

The currency has risen so fast over the last couple years that Canada has run a trade deficit for six consecutive months, including a record $2.5 Billion in July. (In some ways, doesn’t this prove that economic imbalances will ultimately self-correct?!). In addition, to say that Canadian export sector is heavily reliant on the US would be an understatement: “The U.S. bought 70 percent of Canada’s exports in October, down from 75 percent in June, and a record of about 85 percent in 2001.” It’s no wonder that Canadian economic officials have defended the Fed’s QE2 monetary easing program; they know that Canada’s economic health is contingent on a strong US economy.

As for how fluctuations in risk affect the Loonie, it’s not clear. On two separate occasions, the WSJ reported first that “With investors more willing to take on riskier assets than they were the day before, the Canadian dollar was able to move sharply higher,” and then that “Canada’s relatively strong fiscal and economic fundamentals attract safe-haven flows when investors are fleeing from risk.” What a blatant contradiction if there ever was one! Personally, I think that Canada’s economic structure and relatively high debt levels disqualify the Loonie from consideration as a safe-haven currency. That being said, it has notched some impressive gains against other non-safe haven currencies.

If not for its low interest rates, nobody would even mention it in the same breath as the US Dollar or Japanese Yen. Speaking of low rates, the Bank of Canada voted last week to keep its benchmark interest rate on hold at 1% and indicated that it won’t consider raising them for quite some time. Said Central Bank Governor Mark Carney, “There are limits to the divergence that there can be between Canada and the United States.” In other words, the BOC probably won’t hike rates until the Fed does, at which point there will be very little basis for buying the Loonie over the US Dollar.

Analysts tend to agree with this assessment: “The loonie will trade at parity by the end of March and weaken to C$1.01 per dollar through the end of third-quarter 2011, according to…a Bloomberg survey: ‘We still think the Canadian dollar will continue to hover around here and test parity; we don’t think the Canadian dollar is going to back up against the U.S. dollar until the new year.’ Interestingly enough, Canadian investment advisers echo this sentiment: “We’re saying to clients that the Canadian dollar is strong right now, so buying U.S. assets is cheaper than it would be if the dollar were weak.”

It’s a bad sign for the Loonie when even Canadians think it’s overvalued.
Source: http://www.forexblog.com/

Offshore Trading in Yuan Takes Off .

China's currency, pent up inside the country's borders for decades, is emerging as a hot property in global foreign-exchange markets, just months after Beijing allowed the yuan to be bought and sold outside the mainland for the first time.

Daily trading in the yuan has grown from zero to $400 million in the past few months, as the currency of the world's second-biggest economy begins to flow around the globe. Global trading in yuan allows businesses to buy and sell the currency to finance trade, investment and borrowing. It's an important step for the yuan to play a role in global financial markets.

The yuan makes up a sliver of the $4 trillion daily trading in currency markets and is dwarfed by trading in the dollar, yen and euro. But traders are surprised at how quickly it is gaining critical mass.
.The value of the yuan remains tightly controlled by China, so its value won't rise and fall to the same extent as the dollar or euro, in spite of the new trading. Even so, foreign-exchange traders who are embracing the currency see demand for yuan rising sharply. Bankers in New York, London and Tokyo are rushing to set up new trading systems and back offices to trade in yuan.

"This is the beginning of a new era," said Norman Chan, head of Hong Kong's central bank. "This is a step moving to full convertibility of the yuan, and is a major change of the international financial landscape."

The yuan makes up a sliver of the $4 trillion daily trading in currency markets and is dwarfed by trading in the dollar, yen and euro. But traders are surprised at how quickly it is gaining critical mass. Chinese companies are placing yuan into accounts in Hong Kong, where the offshore trading is allowed, and could have as much as 300 billion yuan ($45 billion) there by the end of the year.

The yuan, which closed official trading Monday at 6.6670 per dollar, down slightly on the day, has risen 2.4% against the greenback since mid-June, when China loosened the currency's peg against the dollar and allowed the yuan greater flexibility to rise or fall in value.

The continued growth in yuan trading isn't a foregone conclusion. China could reverse itself and slow the growth of the market. China's leaders fear that if too much currency builds up too quickly overseas, they could lose control of inflation and interest rates, said Xiang Songzuo, deputy director of the Center for International Monetary Research at Remin University of China.

Nevertheless, the establishment of offshore trading in yuan is "game changing," said David Mann, head of research in the Americas for Standard Chartered Bank. "It's arrived much faster than anyone expected."

In July, Chinese regulators opened the door by letting banks and individuals freely trade yuan outside of mainland China for the first time. Creating that infrastructure is a necessary step in allowing the yuan to float freely, and have markets set its value. For now, China will keep its tight rein on the value of the yuan even with the parallel market in Hong Kong.

.On Dec. 6, Chinese regulators broadened the scope of the program, increasing the number of exporters that can use yuan to trade their goods from a few hundred to nearly 70,000.

Some predict it will only be a few years before 20% to 30% of China's $2.3 trillion of imports could be conducted in yuan rather than U.S. dollars. Today less than 1% is done in yuan, according to Standard Chartered.

Mr. Mann says trading in yuan could match that of the Japanese yen before long as the third most-actively traded currency behind the dollar and the euro.

Until now, investors who wanted to speculate on the yuan, or companies that needed to hedge against its fluctuations, could only do so indirectly, through contracts that tracked the currency's moves. Those contracts were useless for businesses that needed actual yuan to buy or sell goods.

To buy and sell yuan offshore, traders need an account in Hong Kong. Chinese companies can move money to offshore yuan accounts only for business purposes, such as exports or imports. And restrictions remain on repatriating that money.

But as long as that money is in an offshore yuan account, the holder is free to trade with it in any way.

Already, banks such as Citigroup Inc. and HSBC are offering investors yuan-priced options and interest-rate derivatives. Mutual funds dedicated to yuan-priced investments have already been created.

The move has opened the doors to wider issuance of yuan-denominated bonds and other investments. McDonald's Corp. and Caterpillar Inc. recently became the first U.S. non-financial corporations to sell debt priced in yuan, in what is being nicknamed the "Dim Sum" bond market.

A big driver of the increase in yuan holdings offshore is emerging economies, major trading destinations for China. HSBC forecasts that at least half, or nearly $2 trillion worth, of China's cross-border trade with emerging markets could be settled in yuan annually within three to five years.

For example, countries rich in natural resources that export commodities to China could get paid in yuan and then use the yuan to buy finished goods and services from China—cutting out the cost and hassle of converting to dollars.

The moves come against a broader background of growing Chinese concern over the country's reliance on the dollar.

Long term, the offshore yuan market could decrease demand for the dollar and lower its value. That's in part because Chinese companies doing business with counterparts in other countries wouldn't need U.S. dollars to conduct that business as they do today.

In Hong Kong, where speculation is an obsession, individual investors quickly piled in to yuan, even though they are limited to converting only 20,000 yuan a day. On display by bank teller windows are interest rates for Hong Kong, U.S and now Chinese deposits.

For the yuan to become fully convertible, China would have to allow it to be exchangeable for other currencies at any time, something that's not possible under the new regulations.

The keen level of interest in the offshore yuan trading was evident last week in midtown Manhattan at the headquarters of HSBC. Some 80 traders from 20 banks came to hear a presentation organized by ICAP PLC on offshore yuan trading featuring Esmond Lee, an official from the Hong Kong Monetary Authority. Previous sessions in Hong Kong and London had been similarly packed.

"What makes it exciting is that this is a move by China in a direction that many have been waiting for," said Edward Brown, an executive vice president at ICAP, the world's largest broker of currency trades among banks.

Source: http://www.wsj.com/

The Value of the Euro

A thought while waiting at the gate at Frankfurt Airport: 20 years ago before the near-universal availability of credit cards and ATMs, having a single currency for Europe would have offered tremendous practical advantages. You could fly from Dublin to Paris to catch a connecting flight to Helsinki and back without the need for constant visits to the currency exchange bureau...

But of course back then there was no Euro. Today, we have the currency union but information technology has drastically reduced the practical benefits...You basically just live life as you always do, paying for lots of things with plastic and withdrawing small amounts of cash when you need it.
Which makes me wonder if moving the different countries of Europe into a single currency wasn’t actually a step against the tides of change. Maybe the real move for the 21st century is for large to go to smaller currency areas. It would arguably have done the “rust belt” some good over the past 30 years to be able to devalue relative to higher-growth portions of the United States. And everyone knows that economic conditions in China’s coastal cities are radically different from what you find in the rural north and west.
It's true that as a traveler it's much less of a pain to deal with multiple currencies these days. And it's also true that at this particular moment, as parts of America and the euro zone exit recession at drastically different paces, independent monetary policies look really nice. But I don't know that Mr Yglesias is right on the broader question.
Easy movement across borders (and price transparency) is just one of the benefits from euro membership. A much bigger one, one imagines, is an end to exchange rate risk, which presumably makes it cheaper to conduct cross-border business, especially as time horizons grow longer. (Of course, one could question whether a union that involves a unified monetary policy but no unified fiscal or regulatory policy has actually eliminated exchange rate risk; certainly some folks may be weighing the likely future path of euro-drachma rates in evaluating potential investments.) The euro also imposed monetary discipline on governments that lacked the German resolve to keep inflation tamed. Though again, this made it easier for those same governments to borrow, which was unfortunate as no corresponding fiscal discipline was imposed.
I've argued before that an underappreciated factor behind America's wealth is the benefit of a large and fairly homogeneous domestic market. The complete lack of variable exchange rate or inflation risk is a part of that, and one which facilitates investment.
A question for another time is the extent to which the Midwest's long-term problems could have been solved by a devaluation. I'm sceptical. I think the decline in question had more to do with the explosion of old models of industrial clustering by plummeting transportation and communication costs.
source: http://www.economist.com/

Euro Heads for Weekly Decline on Europe's Debt Concerns, Ireland Downgrade

The euro was set for a weekly loss against 10 of its 16 major counterparts as concerns Europe’s debt crisis will linger damped demand for the region’s assets.

Europe’s currency traded near the lowest in more than a week against the dollar after Fitch Ratings downgraded Ireland. European Central Bank President Jean-Claude Trichet and ECB Governing Council member Miguel Angel Fernandez Ordonez will speak to reporters in Madrid today. The dollar headed for a weekly gain versus most major counterparts before a report forecast to show U.S. consumer confidence improved this month.

“Residual concern about European debt, I don’t think it’s going to go away fully for quite some time,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “We haven’t seen a lot of rise in the euro.”

The euro fetched $1.3241 at 11:10 a.m. in Tokyo from $1.3239 in New York yesterday, when it touched $1.3165, the lowest since Dec. 2. It has dropped 1.3 percent against the greenback this week. The euro was at 110.85 yen from 110.87 yen, following a 0.5 percent drop yesterday. The dollar traded at 83.72 yen from 83.76 yen, set for a 1.4 percent gain this week.

Fitch yesterday cut Ireland’s credit rating to BBB+ from A+, three steps above non-investment grade, citing the mounting cost to rescue the nation’s banking system.

Ireland Downgrade

“The downgrade reflects the additional fiscal costs of restructuring and supporting the banking system,” Fitch said in a statement. “Ireland’s sovereign credit profile is no longer consistent with a high investment grade rating.”

Fianna Fail, the main party in the nation’s coalition government, will put Ireland’s 85 billion-euro ($113 billion) aid package from the European Union and International Monetary Fund to a parliamentary vote Dec. 15, Prime Minister Brian Cowen said yesterday in an e-mailed statement.

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, was little changed at 80.046, set for a 0.8 percent advance this week.

The Thomson Reuters/University of Michigan preliminary consumer sentiment index rose to 72.5 this month from 71.6 in November, according to another Bloomberg survey before tomorrow’s data. Applications for U.S. jobless benefits decreased to 421,000 last week, from a revised 438,000 the prior week, Labor Department figures showed yesterday.

‘Economic Strength’

“Dollar selling has been reversed because of improving economic fundamentals,” said Koji Fukaya, chief currency strategist in Tokyo at Credit Suisse Group AG. “Yields are likely to stay around current levels and may rise further, should data show economic strength into next year.”

Demand for the dollar was limited on speculation Federal Reserve policy makers on Dec. 14 will discuss a plan to extend Treasury purchases to support growth. They announced last month a $600 billion second round of debt buying through June.

“I don’t think the Fed wants yields to keep rising right now, and they are likely to try to tame yield gains next week,” said Kengo Suzuki, manager of the foreign bond department in Tokyo at Mizuho Securities Co. “The dollar is likely to switch back to a negative trend.”

Treasury 10-year yields were little changed at 3.20 percent today, after dropping seven basis points, or 0.07 percentage point, yesterday, according to BGCantor Market Data. Government bonds tumbled this week after U.S. President Barack Obama agreed to extend tax reductions for two years and a payroll-tax cut.

China’s Inflation

The premium offered by 10-year government bonds in the U.S. over Japan was 1.95 percent today, after widening to about 2.04 percent on Dec. 8, the most since June, data compiled by Bloomberg show.

The yen may rise on speculation accelerating inflation will prompt China to act further to cool growth, Suzuki said.

“China is highly likely to do something this weekend and add to monetary tightening,” Mizuho’s Suzuki said. “This may lead to risk aversion and cause the yen to be bought, even though most of it may have been priced in.”

China’s consumer prices rose 4.7 percent in November from a year earlier after increasing 4.4 percent in October, according to a Bloomberg News survey of economists before tomorrow’s data. That would be the sharpest increase since August 2008.

China’s trade surplus narrowed to $22.9 billion in November from $27.2 billion in October, the government reported today.

The yen has gained 11 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The euro has dropped 9.3 percent, while the dollar is down 1.1 percent.

Source: http://www.bloomberg.com/

Euro Zone Crisis: Flumbing the ball

DID Jean-Claude Juncker, Luxembourg's prime minister who is also head of the euro zone's finance ministers, score an own-goal yesterday? With the markets savaging bonds issued by “peripheral” countries such Greece, Ireland and Portugal, he proposed that euro-zone members should issue collective “E-bonds” for up to 40% of the euro zone's GDP. The idea came out of the blue in an article written with Giulio Tremonti, the Italian finance minister. Common Eurobonds, they claimed, would “send a clear message to global markets and European citizens of our political commitment to economic and monetary union and the irreversibility of the euro.”

Their fellow finance ministers, though, do not seem to have received it particularly well. Germany, in particular, has been allergic to any notion of Eurobonds that would bring it a step closer to a “transfer union”. If not actual money, the Eurobonds proposal would mean extending part of Germany's hard-won credit-worthiness to all European countries. The French seemed less than enamoured. Only the poor Greeks welcomed it.

So no sooner had Mr Juncker launched his idea than it fizzled. Late last night, when he emerged at the end of the meeting, he did not mention the subject. And when he was asked about his op-ed in the Financial Times, he replied: “It was not part of the agenda. We did not discuss it.” He had written the article to show the idea “is not as stupid as it sounds”.

Plainly his fellow ministers did think it was silly, but he claimed he was not upset. In 2005, noted Mr Juncker, he had proposed a “European semester”, the notion that countries should submit their budget outlines for scrutiny by Brussels well before they are approved by national parliaments. The idea was quashed then, as it was as the beginning of the year when the Greek debt crisis broke out. But in the autumn it was accepted as part of strengthened EU “economic governance”.

“Now it seems that the fathers are numerous,” said Mr Juncker, “The same fate is reserved for the Eurobonds.”

Another defeated idea, this time proposed by the IMF and by the Belgian government, was to increase the size of the euro zone's bail-out funds, worth €750 billion ($1 trillion), to remove any doubt that Portugal and Spain could be helped should the need arise. “For the time being there is no need to increase it,” declared Mr Juncker curtly. Klaus Regling, who runs the €440 billion European Financial Stability Facility (EFSF), the biggest part of the bail-out fund, was on hand to explain that the fund was “sufficient” to help Spain if needed. The actual amount that could be lent would be less than the €440 billion, Mr Regling said, but he declined to give a figure.

For now, the finance ministers want to press ahead with completing measures that they have started: toughening up supervision and sanctions for countries that breach the fiscal limits set by the euro zone's stability and growth pact (deficits no bigger than 3% of GDP and accumulated debt no greater than 60% of GDP), changing the treaty to make the bail-out fund permanent and setting up a system to restructure the debt of insolvent countries from 2013 onwards.

The latter proposals have been softened from demands by some Germans that any country seeking a bail-out should renegotiate its debt with creditors. Now debt restructuring would only be considered “case by case”, and in line with current IMF practices.

In the absence of radical measures—be it a demonstrative act of integration like issuing joint Eurobonds, or getting an bigger bazooka for the EFSF, or even forcing over-indebted countries to restructure their debt immediately—the euro zone seems destined to muddle along for now. The euro zone can only hope that the European Central Bank, which is buying up the bonds of troubled countries and is providing liquidity to banks, can defend the euro zone long enough for better days to come.

An unexpected threat has appeared in the form of Eric Cantona, the former football star who has called for French citizens to stage a mass withdrawal of funds from banks today. This, he claimed, would be a much more effective means of protest than marches and strikes. For Mr Juncker, the call is “totally irresponsible”. Olli Rehn, the economics commissioner, claimed to be a fan of Mr Cantona's former club, Manchester United, but said: “Eric Cantona is a better footballer than an economist.” That might seem harsh coming from a former Finnish professional goalkeeper.
Source: http://www.economist.com/

Euro up against dollar after eurozone meeting

The 16-nation euro is up slightly against the dollar after eurozone ministers said the bailout fund is large enough, but did not rule out boosting it to fight the debt crisis.
The euro bought $1.3361 in morning European trading Tuesday, up from $1.3322 late in New York on Monday. The British pound is up to $1.5764 from $1.5721, while the dollar rose to 82.69 Japanese yen from 82.60 yen.
The euro sank about 10 percent in November after the EU was forced to bail out Ireland. Investors are worried that Portugal or even Spain may be next, and that emergency aid funds may not be enough.
At a meeting, eurozone officials didn't rule out refueling the bailout fund with more money but said that was not necessary at the moment
Source: http://www.cnnmoney.com/

Yen Advances as Europe Debt, China Tightening Concerns Boost Saftey Demand

The yen strengthened to a three-week high against the dollar as concerns about Europe’s debt crisis and China’s efforts to cool its economy boosted demand for Japan’s currency as a refuge.

The yen advanced against all of its 16 major counterparts as ministers from the 27 European Union countries are set to give formal approval today to an Irish aid package announced on Nov. 28. Asian stocks fell as the China Securities Journal reported today that the period around this weekend may be a “window” for China to raise interest rates. Demand for the Australian dollar was limited before the Reserve Bank of Australia concludes a policy meeting today.

“There are many risk factors” about the global economy, said Kazuyuki Kato, treasury department manager in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-biggest bank. “People can’t buy risk currencies aggressively. Cross currencies will struggle to rise against the yen.”

The yen rose to 82.35 per dollar as of 12:10 p.m. in Tokyo from 82.66 in New York yesterday. It earlier touched 82.34 per dollar, the strongest since Nov. 12. The yen was at 109.88 per euro from 110. The dollar fell to $1.3342 per euro from $1.3308 yesterday, when it touched $1.3442, the lowest since Nov. 23.

Belgian Finance Minister Didier Reynders said a European bailout fund might be expanded, breaking ranks with German Chancellor Angela Merkel and French President Nicolas Sarkozy. He said European finance ministers meeting in Brussels will discuss Portugal’s outlook amid concern it will need aid.

Europe’s Crisis

Ireland’s parliament will vote today on its budget, which must be passed for the aid to go into effect. European Central Bank Vice President Vitor Constancio will hold a speech at a conference in Paris today.

“I can’t be bullish on the euro,” said Daisaku Ueno, president in Tokyo at Gaitame.com Research Institute Ltd., a unit of Japan’s largest currency margin company. “The crisis won’t ease anytime soon as officials’ opinions have been divided over how to deal with it. This may deteriorate the region’s economic fundamentals next year as well.”

The euro slid 6.9 percent in November, its biggest monthly drop since May, as Ireland accepted an 85 billion-euro ($113 billion) bailout package from the EU and International Monetary Fund. The Irish government will lay out details today of 6 billion euros of spending cuts and tax increases. Prime Minister Brian Cowen’s Fianna Fail party has a minority of seats in parliament and may struggle to pass the budget.

China’s Rates

The euro has declined 9.2 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar is down 1.8 percent, while the yen has gained 12 percent.

The yen also rose today as the Nikkei 225 Stock Average fell 0.7 percent and the Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, dropped 0.9 percent.

China’s central bank may raise rates around the time set for the release of November’s inflation data, which has been scheduled for Dec. 13, the China Securities Journal said. It cited Li Huiyong, an analyst at Shenyin & Wanguo Securities Co, who forecast consumer prices may rise 5.1 percent last month.

“China will continue to tap the brakes on its economy,” said Keiji Matsumoto, a currency strategist in Tokyo at Nikko Cordial Securities Inc. “The bias is for the yen to strengthen against growth-sensitive currencies.”

The yen typically strengthens in times of financial turmoil as Japan’s trade surplus means the nation does not have to rely on overseas lenders.

RBA Meeting

RBA Governor Glenn Stevens and his board will keep borrowing costs unchanged, all 25 economists surveyed by Bloomberg News forecast.

“The RBA’s focus, rightly, is on medium-term issues like the terms of trade and the mining boom,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “The risks are for a less dovish release.”

Australia’s currency traded at 99.13 U.S. cents from 98.99 cents, after dropping 0.3 percent yesterday. It fell to 81.64 yen from 81.82 yen.

The dollar fell versus 11 of its 16 major counterparts amid speculation the Federal Reserve will buy more bonds beyond $600 billion to keep the economy from slipping back into a recession.

Policy makers meet next week to review their plan to buy Treasuries through June and expand record stimulus in a bid to reduce 9.8 percent unemployment and keep inflation from slowing.

“Dollar sell-off is coming back in the markets as the Fed said it may expand the bond purchases, increasing uncertainty about the U.S. economy,” said Kengo Suzuki, manager of the foreign bond department in Tokyo at Mizuho Securities Co.

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, fell 0.3 percent to 79.434.

Source: http://www.bloomberg.com/

Euro May Reverse Advance Against Dollar on Resistance: Technical Analysis

The euro may reverse recent gains versus the dollar should the currency fail to advance above so- called resistance at $1.3471, according to Forecast Pte, citing trading patterns.
The $1.3471 level represents the 38.2 percent retracement of the euro’s decline from its Nov. 4 high of $1.4282 to the Nov. 30 low of $1.2969, based on a series of numbers known as the Fibonacci sequence. The euro has remained below this resistance level in the past two days, suggesting the currency’s “upside is still limited,” said Pak Lai Ng, a technical analyst at Forecast in Singapore.
“The euro hasn’t even retraced the 38.2 percent level of the recent fall, and this is capping the currency,” Ng said in an interview. “It’s bearish, and the euro may extend the November drop.”
The euro traded at $1.3309 at 7:49 a.m. in Tokyo from $1.3308 in New York yesterday, when it rose to $1.3442, the highest level since Nov. 23. Since touching a two-month low of $1.2969 on Nov. 30, the euro has rebounded 2.6 percent.
The common currency is likely to “test the $1.3000 level” if it holds below $1.3471, Ng said, referring to the Nov. 30 low of $1.2969 and the Dec. 1 low of $1.2971, based on data compiled by Bloomberg. “If it’s going to test, it’ll probably go below toward the August-September lows” of $1.2588 and $1.2644, respectively, Ng said.
Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. A break above resistance or below support indicates a currency may move to the next level.
In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.
Source: http://www.bloomberg.com/

Euro's Worst to Come as Best Forecasters See Crisis Spreading

The most accurate foreign-exchange strategists say the euro’s worst annual performance since 2005 will extend into next year as the region’s sovereign-debt crisis saps economic growth.
Standard Chartered Plc, the top overall forecaster in the six quarters ended Sept. 30 based on data compiled by Bloomberg, predicted the euro may weaken to less than $1.20 by mid-2011 from about $1.33 today. Westpac Banking Corp., the second most accurate, is “bearish in the short term,” and No. 3 Wells Fargo & Co. cut its outlook at the end of last week.
The 16-nation currency’s first weekly gain against the dollar since Nov. 5 may prove short-lived amid mounting concern that more nations will need rescues. European Central Bank President Jean-Claude Trichet delayed the end of emergency stimulus measures last week and stepped up government-debt purchases as “acute” market tensions drove yields on Spanish and Italian bonds to the highest levels relative to German bunds since the euro started in 1999.
“We’re going to get a continuation of the problems that Ireland, Portugal, Spain and others are suffering,” said Callum Henderson, Standard Chartered’s global head of foreign-exchange research in Singapore. “The fundamental issue is these are countries that have relatively large debts, large budget deficits, large current-account deficits, they don’t have their own currency and they can’t cut interest rates. The only way they can get out of this is to have significant recessions.”
Sentiment Reverses
Ireland’s budget deficit will rise to more than 32 percent of gross domestic product this year, including the cost of bailing out the nation’s banks, European Commission data from Nov. 29 showed. Spain’s deficit will be 9.3 percent in 2010. Portugal’s total debt will reach almost 83 percent of GDP this year from about 76 percent in 2009, according to the commission.
Just a month ago the euro reached $1.4282, the strongest level since January, as traders sold the dollar on speculation the Federal Reserve would debase the greenback by printing more cash to purchase $600 billion of Treasuries in so-called quantitative easing.
Now, those concerns are being overshadowed by the possibility that Europe’s economy slows next year as governments impose austerity measures to reduce budget deficits, while officials drive bond investors away with talk of forcing them to take losses as part of future bailouts.
Risk Reversals
Demand for options granting the right to sell the euro over the next three months relative to those allowing for purchases reached the highest level since June last week. The so-called 25-delta risk reversal rate fell to negative 2.5225 percentage points from negative 0.5725 in October.
European banks paid the biggest premium to borrow in dollars through the swaps market since May last week, a signal the outlook for the euro may deteriorate. The price of two-year cross-currency basis swaps between euros and dollars reached minus 51.8 basis points on Dec. 1, from minus 20.9 on Nov. 4.
“We have a lot of time to go” before the situation in Europe is resolved, John Taylor chairman of FX Concepts LLC, the world’s biggest currency hedge fund, said Dec. 2 at the Hedge Funds New York Conference hosted by Bloomberg Link. “That means the market is going to be twitching.”
Taylor predicted some nations may leave the common currency. Stronger members “have to say ‘enough, you guys, get out of the euro,’” he said. “The risk that Spain and Italy will get into trouble is going to cause the euro to get quite weak.”
The region’s economy may expand 1.4 percent next year, compared with 2.5 percent in the U.S., according to the median estimate of more than 20 economists in Bloomberg surveys.
Market ‘Tensions’
“Uncertainty is elevated,” Trichet told reporters after the ECB left its benchmark interest rate at 1 percent on Dec. 2. “We have tensions and we have to take them into account.”
The ECB will keep offering banks as much cash as they want through the first quarter over periods of as long as three months at a fixed interest rate, Trichet said. That marks a shift from last month, when he said that the ECB could start limiting access to its funds.
While the euro rose 1.3 percent against the dollar last week, it’s down 5.6 percent from Nov. 4. For the year, it has fallen 6.7 percent, following a gain of 2.51 percent in 2009.
Westpac predicts the euro may weaken to $1.2650-$1.2670 in one month, said Lauren Rosborough, a senior strategist in London. The bank then expects the Fed’s bond-purchase plan to weigh on the dollar, according to Robert Rennie, head of currency research at Westpac in Sydney.
‘Source of Negativity’
“As we progress through next year, we see quantitative easing in the U.S. as an ongoing source of negativity for the U.S. dollar,” Rennie said. “We’ve got the euro up to $1.35 by March and $1.38 by June.”
Federal Reserve Chairman Ben S. Bernanke said yesterday the economy is barely expanding at a sustainable pace and that it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month to spur growth.
Unlike the Fed, the ECB isn’t conducting quantitative easing. That helped keep the euro from matching this year’s low of $1.1877 reached on June 7.
Outside of the most accurate forecasters, strategists are hesitant to reduce their estimates. Even as the euro slumped 6.9 percent last month, the median mid-2011 estimate of 41 strategists surveyed by Bloomberg rose to $1.36 from $1.35.
Germany is making up for some of the weakness in the economies of Greece, Ireland, Portugal and Spain. Last week the Nuremberg-based Federal Labor Agency said the number of Germans out of work declined a seasonally adjusted 9,000 to 3.14 million, the lowest level since December 1992. German business confidence surged to a record in November as domestic spending increased, the Ifo institute in Munich said on Nov. 24.
Trichet’s Signal
Trichet signaled on Nov. 30 that investors are underestimating policy makers’ determination to shore up the region’s stability. He said in Paris on Dec. 3 that euro-area governments need a “quasi” fiscal union.
“There will be sufficient political will to find measures that will bind the system together,” said Jane Foley, a London- based senior currency strategist at Rabobank International, one of the most bullish on the euro among the most accurate forecasters. “The euro will come out of this stronger.”
Foley said the euro will strengthen to $1.40 in the first quarter and to $1.45 by the end of June.
Traders are anticipating more declines as the U.S. economy picks up speed.
Diverging Economies
The U.S. created jobs in November for a second month, data from the Labor Department in Washington showed Dec. 3. Two days earlier, the Institute for Supply Management’s factory index showed manufacturing expanded for a 16th month. By contrast, growth in Europe’s GDP slowed to 0.4 percent in the third quarter from 1 percent in the three months ended June 30, according to EU figures on Dec. 2.
As the euro region’s most-indebted nations cut spending to bring their deficits under control, a weaker euro will be needed to cushion their economies, said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the fifth most accurate forecaster. The bank says the euro will trade at $1.25 by the end of June and $1.20 in the third quarter.
Declines in the bonds of euro-region members including Ireland and Spain have accelerated after EU leaders agreed on Oct. 29 to consider German Chancellor Angela Merkel’s proposal to force bondholders to share the cost of future bailouts.
Wells Cuts
The crisis prompted Wells Fargo to lower its first-quarter target for the euro to $1.37-$1.38 from a November forecast of $1.41, said Nick Bennenbroek, head of foreign-exchange strategy in New York. He sees the currency at $1.25 by late next year.
The debt crisis “will remain with us for longer, which is why we lowered our targets,” he said. “The move in the euro has been particularly rapid and you can say the currency markets have been panic driven, so we feel like it’s overdone. We do expect the euro to fall over time but we expect the decline to be more orderly than has been the case recently.”
Companies participating in the ranking were compared based on seven criteria: six forecasts at the end of each quarter for the close of the next, starting in March 2009, plus one annual estimate, which was made at the end of September 2009 for currency rates as of Sept. 30, 2010.
Only firms with at least four forecasts for a particular currency pair were ranked for it, and only those that qualified in at least five of eight pairs were included in the ranking of best overall predictors.
Source: http://www.bloomberg.com/

Breaking up the euro area: How to resign from the club

MEMBERSHIP of the euro is meant to be for keeps. Europe’s currency union is supposed to be immune from the sort of speculative attack that cracked the exchange-rate mechanism, the system of currency pegs that preceded it, in 1992-93. A lesson from that time is that when the foreign-exchange markets are far keener on one currency than another, even the stoutest official defence of a peg between the two can be broken. Inside the euro zone, no one can be forced to devalue because no one has a currency to mark down.

The strains in euro-zone bond markets this year show that there are other ways for markets to drive a wedge between the strong and the weak. Concerted selling of their government bonds has forced Greece and now Ireland to seek emergency loans from other European Union countries and the IMF. Portugal may soon join them in intensive care. Spain is in the markets’ sights and the trouble is spreading to Italy, home of the world’s third-largest market for public debt.

The convergence of government-bond yields that was spurred by the euro’s launch has thus been sharply reversed. The idea that the euro itself might also be reversible and that one or more countries might revert to national currencies is no longer unthinkable. This would be costly and cause huge financial shocks for both leavers and those left behind. But the bar to exit, though high, would be surmountable.

Related items
The crisis in the euro area: No easy exit
Dec 2nd 2010The idea of breaking up the currency zone raises at least three questions. First, why would a country choose to leave? Second, how would a country manage the switch to a new currency? Third—and perhaps most important—would leavers be better off outside the euro than inside it?

The main reason why a country might choose to leave the euro is to regain the monetary independence it sacrificed on joining and to set monetary policy to suit its own economic conditions. This could apply to the strong as well as the weak. Germans may long to have the Bundesbank in charge again. It would surely not take risks with long-term inflation, by keeping liquidity lines open to weak foreign banks, or with its political independence, by buying government bonds. And given the strength of the German economy, it might raise interest rates soon.

As it is, the European Central Bank (ECB), though based in Germany and modelled on the pre-euro Bundesbank, has had to react to the economic and financial weaknesses of the rest of the euro zone in ways that Germans do not like. Add to this taxpayers’ disgust at having to stand behind the public debts of less thrifty countries, and the idea of abandoning the euro looks enticing to some Germans. That appeal might extend to countries, such as Austria and Netherlands, with strong economic ties to Germany. They might prefer to join a new D-mark block than to stay with the euro, were Germany to leave.

.Weak economies might also hanker for a monetary policy tailored to their own needs. The euro may have abolished market-based nominal exchange rates but it has led to marked divergences in real exchange rates (see chart). Consumer prices in peripheral countries have risen at a faster rate than in Germany since the start of the euro in 1999. So have wages, making it hard for firms in those countries to compete with Germany in foreign markets and with low-cost imports from Asia in their home markets. Leaving the euro would allow Italy, Spain and the rest to devalue and bring their wage costs into line with workers’ productivity.

How could this be done? Introducing a new currency would be difficult but not impossible. A government could simply pass a law saying that the wages of public workers, welfare cheques and government debts would henceforth be paid in a new currency, converted at an official fixed rate. Such legislation would also require all other financial dealings—private-sector pay, mortgages, stock prices, bank loans and so on—to be switched to the new currency.

The changeover would have to be swift and complete to limit financial chaos. Bank deposits would have to be converted at the same time, and the same rate, as overdrafts and mortgages to keep the value of banks’ debts in line with their assets. When Argentina broke its peg with the dollar in 2001, it decreed that bank deposits should be switched at a more favourable exchange rate than loans, in an effort to appease savers. This imposed losses on an already crippled banking system, and led to a sharp contraction in domestic credit.

The central bank would have to distribute new notes and coins fast. It would also have to set interest rates, and would need a lodestar, probably an inflation target, to guide it. Whatever the official exchange rate at a changeover, the new currency would quickly find a market level against the euro and other currencies. A new D-mark would be expected to rise against the now-abandoned euro; a new drachma or punt would trade at a big discount to its official changeover rate—a devaluation, in effect.

The switch to the euro was smooth, but it was planned for years in great detail and in co-operation among countries. The reverse operation would be far messier. The mere prospect of euro break-up could cause bank runs in weak economies as depositors scrambled to move savings abroad to avoid forced conversion. If Germany were the leaver, it would face an inward flood.

To prevent such a drain, a weak country thinking of leaving the euro would have to impose caps on bank withdrawals, other forms of capital controls, and perhaps even restrictions on foreign travel. That might not work in a region as integrated as Europe—and if it did it would depress the economy by limiting the circulation of cash for commerce. It would also cut the country off from foreign credit, because foreign firms and banks would fear that their money would be trapped. Trade would suffer badly, at least for a while.

A departing country would also have to prepare for legal challenges. A change in the currency in both weak and strong countries would impose devastating losses on businesses and depositors at home and abroad. Savers who could not get their money out of banks before its forced conversion would not be happy to be paid in a devalued currency. Many would sue, as happened in Argentina. The legal uncertainty would further hamper the banks, which would be loth to extend credit for fear they might yet be forced to make depositors whole.

Foreign banks and pension funds holding weak economies’ euro-denominated government bonds would suffer an effective default. They might sue, too. A sovereign might expect to win its legal battles if it drafted its conversion laws well and if it could assert the primacy of its law over European law. But the European dimension would at the very least mean that costly legal battles would drag on.

All the while a government seeking to replace the euro with a devalued currency could scarcely rely on bond sales to finance its operations. But such a country would have long been cut off from capital markets anyway. The prospect of monetary independence would give it new options. In the run-up to passing a conversion law, the government could pay some of its bills, including wages, by issuing small-denomination IOUs, which could be traded for goods and services. These would form a proto-currency that would trade at a discount to the remaining euros in circulation—a shadow price of the devaluation to come. Since the money supply would be shrinking fast, as euro deposits fled the country, this sort of paper would be accepted readily. Scrip issued by the province of Buenos Aires circulated freely months before Argentina’s dollar peg broke.

Germany would be in a happier position. Should it opt to leave, it would have an incentive not to convert its stock of euro-denominated debts to claims in a new, stronger currency. It could instead choose to repay those depreciating debts over time. Rather than invite legal disputes, however, it might instead go for a comprehensive conversion and keep balance-sheets straight. Germany would in any case be able to issue cheap debt in the run-up to conversion. A rush out of euros into German assets in anticipation of revaluation would drive up the prices of Bunds—conceivably to a point where the interest rates on them were negative.

Even so, Germany would face costs it could not control. A new D-mark would surely rise steeply, harming the country’s exporters. Exit from the euro area would deplete its customers in the rest of the zone of the cash and credit needed to buy German goods. As a big creditor, it holds lots of assets elsewhere in the zone. The value of these would plummet in new D-marks, and a contraction in credit in the rump of the euro zone would mean that the value of assets, including businesses that might otherwise have survived, would be destroyed. Germany would no longer be able to influence the euro area’s monetary policy. It could not prevent the ECB from stoking inflation, which would undermine the real value of German loans made to euro-zone banks, businesses and governments.

A determined country could leave the euro and establish its own currency again: nothing is truly irreversible for a sovereign nation. But even the most wilful and powerful state could not fully control the banking chaos and social unrest that a forced currency conversion would unleash. It would be a curious decision for Germany to seek to abandon the euro in search of greater monetary and fiscal stability. It would first have to endure a long period of financial disarray.


Is it worth it?

Countries at the euro zone’s periphery that face years of austerity and high unemployment inside the euro may find it harder to believe that things could be much worse if they left. A devaluation would spare them the grinding wage deflation needed to price the unemployed back into work (though it would not address the economic weaknesses that lie behind poor competitiveness). The spectre of bank runs, high funding costs, default and social unrest might not seem so scary in today’s conditions: some countries are already vulnerable to these. Efforts to ameliorate these problems have so far proved inadequate (see article).

Therein lies the danger for the euro. The cost of breaking up the single currency would be enormous. In the ensuing chaos and recrimination, the survival of the EU and its single market would be in jeopardy. But by believing that a break-up cannot happen, the euro zone’s authorities will always tend to stop short of the radical measures needed to hold the project together. Given the likely and devastating chaos, it would be a mistake for a country to choose to leave. But mistakes occur in times of stress. That is why some are beginning to contemplate the unthinkable.
Source: http://www.economist.com/

US Dollar rises: Thanks a bunch Europe!

Critics who worried that QE2 would crush the dollar have been silenced.

Not that we should create glory out of a very bad global situation, but it looks as if Europe's evolving debt crisis might actually be helping the U.S. Dollar.

It was only last month that world leaders gave U.S. Federal Reserve Chairman Ben Bernanke flak for moving ahead with plans to pump $600 billion into the U.S. economy. While the Fed said another round of so-called "quantitative easing" would give the economy a needed boost, critics argued the move to buy US Treasuries with the freshly printed money would do little but send the greenback into a disastrous downward spiral.

Theoretically, that makes sense: The more dollars in the economy, the less valuable the currency. But from what we've seen – at least so far – the critics are wrong.

It's true the dollar's value has generally been falling for some time now. This might just be a blip, but the greenback's gains have been surprisingly good recently. And it seems critics from German Finance Minister Wolfgang Schaeuble, who called the Fed "clueless," to Japan Prime Minister Naoto Kan, who said the US was pursuing a "weak-dollar policy," might not have foreseen the depths of Europe's ongoing debt problems.
In November, the U.S. Dollar Index, which tracks the greenback against six major U.S. trading partners including the euro, yen and pound, rose 5.09%. This was driven partly by rising bond yields and signs of economic recovery that raised the appeal of U.S. assets.

European contagion

But the most recent gains also had to do with economic uncertainty in Europe. The region's debt crisis unfolded earlier this year with a bailout in May to prevent Greece from defaulting. Now it looks as if the dominoes might continue to fall as observers watch Portugal, Spain and others closely following the $113 billion bailout package European officials presented to Ireland on Sunday.

Earlier this week, the dollar soared against the euro and other major currencies when a rescue deal for debt-troubled Ireland failed to calm investors worried that the debt crisis might spread. At one point on Monday, a day after European officials announced Ireland's bailout package, the euro fell below $1.31 for the first time since September 21. The British pound fell to $1.5565 from $1.5602 and the dollar rose to 84.24 Japanese yen from 84.07 yen.

Portugal is widely considered to be most at risk of a bailout given the size of its debts relative to its economy. But the big worry in the market is a possible bailout for Spain, whose economy is about 12% of the eurozone. Most analysts believe Europe is strong enough to handle bailing out Greece, Ireland and Portugal but Spain could be much tougher given the level of debt in its banking system has due in the coming months.

Given the depths of Europe's troubles, it's no surprise that the dollar is on a relatively modest winning streak. In times of international turmoil and investor anxiety, the U.S. currency tends to gain as it is viewed as a safety net. What's more, some economists forecast that the problems in Europe might actually convince global investors and central bankers to rethink the strength of the dollar as the world's reserve currency.

In fact, Capital Economics economists Julian Jessop and Ben May said in a report days before Europe announced Ireland's bailout package that "Any worries about the implications of additional QE (quantitative easing) for the value of the dollar will surely be trumped by doubts about whether the euro will exist at all."

True, as The Financial Times points out, the euro's fall isn't as low as when Greece accepted its bailout. The Greek crisis saw the euro tumble in May to $1.20 – far lower than the drops seen during the past few weeks. Nevertheless, Europe's latest debacle in Ireland has fanned skepticism over the 16-nation euro currency as officials including German Chancellor Angela Merkel vowed it would survive the debt crisis.

The dollar's rise in the backdrop of Europe's demise might likely be temporary. After all, the U.S., though probably not to the scale of Ireland and other European countries, has its own debt problems that officials are trying to solve. And some central bankers and even the United Nations have said the greenback's value has been too volatile to be the world's primary reserve currency.

For now at least, it looks as if the dollar is seeing better days.

Source: http://www.finance.fortune.cnn.com/

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