Forex Blog

Despite the huge and quite unexpected drop of the U.S. gross domestic product in the first quarter of 2009 reported today, the stock markets rose globally, spurring euro and other high-yielding pairs in their gain against the greenback. The interest rates left unchanged weren’t a big news for the Forex traders. EUR/USD is now trading near 1.3264.

According to the advance report GDP decreased by 6.1% in the first quarter of 2009. It was down by 6.3% in the fourth quarter of 2008. Forecasts showed -4.9% for Q1 2009.

U.S. commercial crude oil inventories rose one more time last week — by 4.1 million barrels. They are still above the upper boundary of the average range for this time of year.

The Federal Reserve’s FOMC left interest rates unchanged at the range between 0% and 0.25%. They also left the amount of the U. S. Treasury securities that they will buy by autumn unchanged at $300 billion.

EUR/USD rose at a very fast pace today, posting the biggest daily gain since March 18 so far. Mixed news on the U.S. fundamental indicators didn’t affect the trading much as the Forex traders looked at the ECB’s rate cutting action. EUR/USD is currently trading near 1.3413.

Last week initial jobless claims were reported at 669k, which is 12k above than 657k (revised up from 652k). Traders expected a small decline to 650k, but the employment sector is still in its worse state in U.S.

Factory orders increased by 1.8% in February — for the first time after six months of decline (in January they decreased by 3.5%). The forecasts showed 1.5% growth for February.

European Central Bank cut the Eurozone interest rate from 1.5% to 1.25% today, while the markets were almost sure that the rate will be slashed to 1%. This caused a lot of optimism for euro bulls and the currency is dominating the market at this moment.

The gold seems to be becoming the favorite investment around as the traders are afraid of the crisis and the fiat currencies seem to be in a great danger when all those anti-crisis measures will induct a massive wave of inflation, reducing the money’s buying power. In such an environment gold looks like a good investment to save one’s assets and to multiply them if you trade with a considerable leverage. Forex traders may also decide to capitalize the expected upward gold trend as many Forex brokers provide the gold vs. dollar or gold vs. euro pairs.

There is one problem with investing in the gold now — it’s already way overbought. For almost ten years — from 1995 to 2005 the gold has been trading between $250 and $420 per troy ounce. The gold began its rally in 2005 and peaked above $1,030 in March 2008. Now it’s trading not far from that level — near $940 per troy ounce. Gold’s «bubble rally» accompanied the similar rallies in carry trade (GBP/JPY, EUR/JPY, AUD/JPY currency pairs, etc.) and in oil. Both the carry trade and the oil rallies ended with the bubble bursts as the financial crisis reached its apogee in September 2008. The gold bubble lived through that period falling to is local minimum of $680 in October and that minimum was far above the recent average trading range for this commodity. You can compare a carry trade unwinding with the drawdown in the gold prices during the crisis time from these charts:

Gold Chart

AUD/JPY Chart

The gold is praised by many as the real investment in the world full of the paper money and the bills that go default or the shares of the companies that may just vanish. Gold is seen as some kind of a standard of value compared to other assets. Average Joe might even hope to use the gold as the method of payment during the harshest times when the fiat currencies won’t be considered as anything worthy. In reality gold has almost no real value. Of course, it’s nice and makes a good jewelry but its value has nothing to do with its current price. The current price was raised by the investors, traders and the short-time speculators. Investors opt to gold as the safe haven investment, traders buy it because they can get an almost risk-free ROI during the time of the near-zero interest rates; the short-time speculators just find a good opportunity in riding the wave and gaining from the daily or weekly pull-backs on the gold market.

But the bubble will continue to grow until one day it bursts. So, when will it happen? It will happen only when two conditions become true. First, the financial markets should offer something else for the investors to get in — the higher interest rates by the major central banks is a good indicator that the investors now have better ways to multiply their funds than sitting on the piles of gold. Second, stability should rule the finances — not many investors will go investing into South African or Russian papers (which still offer more than 10% ROI) if there is a high probability to lose their money. Gold offers safety and the new investments should be also considerably safer. When the traders will have something new to invest in and the safety of their funds will become satisfying they will start to move out of the gold gradually. When the short-time speculators realize that the gold is falling they will start to bet on the short side, pushing the gold down faster, which will trigger the major stop-losses of many long-term investors forcing them out of this asset. As the oil fell from near $150 to $40, the gold will probably fall from $1,000-$1,200 to about $400 in a period of a month or two.

It can’t be known exactly when the right time for the burst comes. For now gold is still a good buy — central banks maintain the near-zero interest rates, the risks are high and the risk-aversion is the general trend. The gold should flourish at least for the next several months, bellying the bubble even further. I’d watch closely for the U.S. interest rate and if it comes close to 3-4% (and they will eventually have to increase the rates because of the budget deficit-induced inflation) that means the major part of the gold investors will start to slowly move out of it. But for now, selling the gold probably won’t be a good trade.

EUR/USD showed some really promising growth earlier today. The optimistic mood at the financial markets was based on the FOMC meeting’s expectations and the expectations that the «bad bank» plan will be approved soon. The Federal Reserve meeting showed that the committee is still sees the U.S. economic conditions as deteriorating. EUR/USD is currently down to 1.3125 — down from 1.3225 level. where it traded right before the FOMC statement release.

U.S. commercial crude oil inventories advanced by 6.2 million barrels last week. Considering 1.2 million barrels growth during the previous week, the oil inventories now show that the supply is significantly greater than the demand for this energy resource.

Federal Open Market Committee at its scheduled meeting, which ended today, decided to leave the interest rate unchanged in the range between 0% and 0.25%. The released statement says that the economy declined further since their last meeting in December and that they will need to expand the purchases of the troubled assets and the long-term Treasury securities as well:

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

My last forecast (for the year 2008) missed the real world market action significantly. The financial crisis made a lot of the forecasts made by the analysts and traders useless but, nevertheless, I still wish to offer my vision for the next year. This is just my opinion and it shouldn’t be taken as a serious forecast or some guide for trading.

EUR/USD will go down in 2009 and will probably reach 1.2000-1.2400 and then jump up to about 1.3000.
GBP/USD will head down; probably, to a parity.
USD/JPY will be very volatile, falling down to about 80.00 and rising up to about 100.00.
EUR/JPY will be even more volatile ending up the year 2009 not far from 130.00.

Oil. My last forecast on this important commodity missed its real trading range by the tens of dollars. In 2009 the oil will most probably remain below $75/barrel and will probably reach its bottom near $30.

Interest rates will remain quite low in 2009 but, starting from the middle of the year, the central banks will begin to increase them gradually:
Fed’s one will be near 1% by the end of 2009.
ECB — close to 2%.
Bank of England — ~1%.
Bank of Japan — ~0.5%.

EUR/USD went up significantly today after the CPI report showed another month of deflation, the housing slid and the Federal Reserve announced that the federal funds rate is reduced. EUR/USD is currently trading near 1.3967.

Consumer Price Index (CPI) decreased by 1.7% at a seasonally adjusted rate in November, following 1% decline in October. The overall year-to-year gain is currently at 1.1%. The price decline exceeds the median analysts’ estimate — -1.3%.

Building permits were at a seasonally adjusted annual rate of 616k in November in U.S. — below October rate of 730k (revised up from 708k) and forecast of 700k. Housing starts fell from 771k (revised down from 791k) to 625k — below the forecast of 730k. That’s an extremely fast drop for the housing sector; its consequences will worsen the situation in the whole U.S. economy.

Federal Open Market Committee decided to cut the interest rate at its two-day meeting, which is ending today, — from 1.00% to the range between 0% and 0.25% as the overall outlook for economic U.S. activity has weakened further. The  U. S. interest rate is now lower than the Japanese and is virtually at its lowest level with no further space to for the Fed to lower it.

EUR/USD rose today after posting a slight decline yesterday and trading in the negative zone for the most of the day as the ECB cut the interest rate and some mixed fundamental reports from U.S. arrived. EUR/USD is currently trading near 1.2794.

Initial jobless claims unexpectedly fell in U.S. last week — from 530k (revised up from 529k) to 501k. According the forecast by the market strategists, the claims should have been up to 540k.

European Central Bank cut the main refinancing rate from 3.25% to 2.50% today. A cut by 50 to 75 basis points was expected by the markets.

Factory orders decreased by 5.1% in October after contracting by 3.1% in September (revised down from 2.5% decline). It was well over the analysts’ estimates that averaged at 4.5% decrease.

EUR/USD currency pair is growing for the second day in a row today after the Federal Reserve and the major central banks cut the interest rates to provide additional help to the tumbling markets. Fed cut the interest rate from 2% to 1.5%, Bank of England — from 5% to 4.5%, European Central Bank — from 4.25% to 3.75%, Bank of Canada — from 3% to 2.5% and Swiss National Bank — from 2.75% to 2.50%. This didn’t influence dollar much — it continued to fall despite some positive fundamentals reports from U.S. today. EUR/USD is currently trading near 1.3652 level above the opening value of 1.3621.

Pending home sales index rose by 7.4% in August after 2.7% drop in July. It’s good growth for the national realty sector because the average forecast was at 1.1% fall for August.

Crude oil inventories added 8.1 million barrels last week following 4.3 million barrels gain a week before. The last two weekly increases pushed crude oil inventories to the upper half of the average range for this time of year.

EUR/USD declined today during the whole trading session as the stock markets were also falling globally. Now  U. S. indexes remain in the neutral zone, but the dollar still stands well against the euro, even after some really bad statistics from U.S. A rapid downfall of EUR/USD followed the Fed’s interest rate decision today and the currency pair now trades near 1.4119.

CPI at a seasonally adjusted rate dropped by 0.1% in August after 0.8% growth in July and zero change forecast for August. Declining prices is one of the worst enemies of the dollar since they allow Federal Reserve to perform interest rate cuts without worrying about the inflation growth.

Net foreign purchases of the long-term U.S. securities were extremely low in July — only $6.1 billion, after $53.4 billion total in June. That was an unexpected result as the average forecast for the capital inflow was at $55 billion.

Federal Open Market Committee decided to keep the federal funds rate at 2.00% today. That decision was expected by the market participants, although, some analysts believed that the rate would be cut today. Despite the consumer inflation declining recently and an extremely troublesome situation with the financial markets, FOMC showed no sign that the rates may raised soon.

EUR/USD had a very big drop today as the stock markets grew in U.S. and the Forex traders expected positive decision from the FOMC monetary policy. ISM report also supported the greenback today with an increase in its index, but the main news was the interest rate decision and (more important) the statement released by the Federal Reserve. After the release of the report, dollar began to go down slightly, but overall it had a very good day against the euro today. EUR/USD went down from 1.5570 to 1.5446 today — the lowest since June 16.

FOMC left the federal funds rate unchanged at 2.00% today. The statement said that the economic situation improves but the employment, housing and financial sectors are still at risk. Nevertheless, inflation uncertainty remains a significant concern for the Federal Reserve. This will probably mean that there will be no further rate cuts or increases during the next meeting or two.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

ISM non-manufacturing index rose from 48.2% to 49.5% in July — this growth exceeds the median experts’ estimate by 0.8%.