It seems that last month’s G7 intervention was the turning point for the Japanese Yen. The Group Of Seven Industrialized nations stepped in the currency markets on March 18^th in order to halt the Japanese yen rise. The coordinated intervention occurred after the yen soared following a massive earthquake, tsunami and nuclear disaster, which struck Japan last month. Speculation the Japanese would liquidate their overseas assets and repatriate their funds for reconstruction triggered a demand for the yen pushing it up to record highs.

The appreciation of the yen created a difficult situation for the Bank of Japan as it could further damp the country’s economy, as well, as the global recovery. Japan is a country heavily relying on exports and a strong yen may hurt the country’s economy risking a fall back into recession.

As investors’ risk appetite begins to heal, the phenomenon of the carry trade begins to re-emerge. A carry trade is a trading strategy where an investor borrows low yielding currencies such as the Japanese yen in exchange for higher yielding currencies such as the Australian dollar. Ultra-low interest rates in Japan provide the ideal condition for investors who want to borrow yen and invest in currencies that offer higher interest rates. The purpose of the carry trade is to earn from the interest rate differentials of the two currencies. The following example will provide a clearer picture on how a carry trade in the fx market works. Suppose you have 1000 Australian dollars and you want to buy the AUDJPY. In the currency markets you earn interest on the currency you buy and you pay interest on the currency you sell (borrow). Thus, buying the AUDJPY pair means that you will earn 4.75% per annum holding Australian dollars and pay 0.25% borrowing Japanese yen. If you buy 100000 Australian dollars using 1:100 leverage you will earn 4.5% interest on that amount, which is about 4500 Australian dollars.

EURJPY and AUDJPY recent gains are due to the return of the carry trade. The Australian dollar is one of the highest yielding currencies of the developed world with 4.75% interest. Investors sold then yen to invest in Australian dollars pushing the pair to a two and a half year high at 90 yen. Also, the yen plummeted against the euro and the pair reached an eleven month high at 123.31 from as low as 106.65.

Fundamentals add further to the view that the carry trade has resumed. The Bank of Japan appears determined to support the country through its crisis by maintaining a super-loose monetary policy. In contrast, world major central banks look ready to tighten their monetary policies. The European Central Bank raised its benchmark lending rate by 25 bps to 1.25% and speculators argue that more rate hikes will follow. Also, The Bank of England is expected to hike their interest rates in May and the Fed is expected to finish its Quantitative Easing program in June. As interest rate differentials between Japan and the rest of the G7 countries are expected to widen, the carry trade is expected to resume.

Written by Easy-Forex

The Japanese Yen and the resumption of the carry trade is an article from:

The Euro found support on dips to below 1.36 against the dollar on Tuesday and had a generally firmer tone, although there was a lack of market leadership amid subdued conditions.

There was a slight fall in the latest US consumer confidence reading, but this followed a big rise the previous month. There was still a feeling of optimism surrounding the economy following recent data and benchmark 10-year Treasury yields rose to a fresh 9-month high above 3.75%.

The Federal Reserve policy response will be a very important short-term focus, especially in view of higher yields. FOMC member Fischer stated that he would oppose any further quantitative easing and there have been other reservations by Fed officials. Markets will monitor comments from Chairman Bernanke very closely later on Wednesday. Any suggestions of a policy shift could provide strong dollar support, although a more cautious line is more likely.

There was a widening of Euro-zone credit default spreads during the day which hampered any further Euro buying support. There are also still very important stresses surrounding the EU countries. There is substantial resistance to competiveness proposals put forward by Germany and France and fears that these measures will be forced through as a condition of providing increased financial support for weaker members. The Euro will remain vulnerable to heavy selling pressure if these tensions erupt and yield spreads widen further.

The Euro pushed to a high just below 1.3690 against the dollar before drifting back to the 1.3650 area as momentum was lacking.

Source: VantagePoint Intermarket Analysis Software

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Yen

The dollar retreated to lows just below 81.80 against the yen on Tuesday before rallying back to the 82.50 area in Asian trading on Wednesday. The yen strengthened briefly following the Chinese interest rate increase on fears over deteriorating risk appetite, but the impact was measured as other asset classes held steady.

There were further reports of capital repatriation which undermined the dollar initially and there were also fears that forthcoming US Treasury coupon payments will also be repatriated back to Japan which would put upward pressure on the yen.

In contrast, yield considerations remained favourable for the US currency as the dollar’s advantage continues to widen. There were comments from a Moody’s analyst warning over the negative consequences if there is no fiscal reform by Japan, although there were also comments that Japan was still a long way from a crisis situation.

Sterling

Sterling again hit selling pressure above 1,6150 against the dollar on Tuesday and retreated to lows just below 1.6040 before steadying. Previously, weakness had been a function of dollar gains, but this time it was due to a weaker UK currency as it also dipped to lows beyond 0.85 against the Euro.

The government announced a GBP0.8bn increase in the banking sector levy for the coming year which had some negative Sterling impact, especially as there was a retreat in the stock market.

There were only limited data releases with a rise in the BRC shop-price inflation rate to 2.5% from 2.1% previously. The CBI also cut its 2011 GDP growth forecasts slightly

Attention will now focus on Thursday’s Bank of England interest rate decision with further speculation that the bank could decide on a rate increase. There will certainly be a high degree of tension ahead of the decision, especially as it appears inevitable that there will be a split decision and Sterling will spike higher if rates are increased. Volatility is likely to remain a key short-term feature for the UK currency as it consolidated above 1.6050.

Swiss franc

After initially holding steady during Tuesday, the franc was subjected to strong selling pressure during the US session and weakened to lows beyond 1.3150 against the Euro. The Swiss currency also weakened to just beyond 0.9650 against the dollar.

There were reports that franc demand had been eroded by a general improvement in risk appetite, although it looks to have been the case that the move was due more to heavy franc selling by major hedge funds.  There is still the possibility of renewed franc support if Euro-zone stresses intensify.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar hit resistance close to 1.0180 against the US dollar during European trading on Tuesday and weakened sharply to lows near 1.0110 following the Chinese interest rate increase. Despite firm buying support on dips, the currency was again rejected near 1.0180 and retreated in Asian trading on Wednesday.

There was a recovery in consumer confidence according to the latest survey, but there will be caution over the domestic economy. There will also be speculation over further increases in Asian interest rates which would tend to undermine commodity prices and unsettle the Australian currency.

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Widening of Euro-zone Credit Default Spreads is an article from:

• Euro edged higher as investors risk appetite starts to heal. Demand for riskier assets starts to rise as tensions in Egypt ease. The euro is also supported by demand from Asian central banks pushing it as high as 1.3688 against the US dollar. Data showed Germany’s Industrial Production eased in December but overall sentiment over Germany’s economy is strong.  Today the euro continues its upward direction rising to 1.3662 dollars and the pair was last traded at 1.3655. Against the Swiss franc, the euro rallied to a two month high hitting 1.3159.
• Against the Japanese Yen, the dollar ticked higher helped by a rise in US Treasury yields. The pair rose as high as 82.51 from 81.76 traded yesterday.
• The Australian dollar dropped after China unexpectedly increased the country’s interest rates. The People’s Bank of China raised the benchmark one year rates by 25 basis points on the last day of the Chinese New Year holiday. The last rate hike in China occurred in December on Christmas day. China is Australia’s largest trade partner and a tight monetary policy in China can hurt the demand for Australia’s commodities. After the news the Aussie fell to 1.0114 versus the dollar from 1.0188. Today the Aussie is holding above 1.0114 and trading in a tight range around 1.0130. It seems that the market is getting used to rate hikes by China in the country’s effort to fight a rising inflation. As long as the rate increases do not substantially affect China’s economy then the negative impact on the market will stay limited.
• Aussie’s neighbor, the Kiwi plummeted on Wednesday after the country’s finance Minister Bill English said that the New Zealand may enter recession again. He said that it is possible the country’s growth slowed in the fourth quarter raising the possibilities of a double dip recession. The Kiwi edged as low as 0.7704 against the dollar from 0.7786 traded yesterday.
• Gold rallied on Tuesday after the unexpected rate hike in China that raised demand for the safe haven metal. The precious metal rose as high as 1367.90 dollars an ounce from 1348.35.

Currency to watch out for: EURUSD & USDJPY

• § The EURUSD pivot point is at 1.3605 with a preference to enter into Long positions at 1.3615
• § The USDJPY pivot point is at 82.00 with a preference to enter Long positions at 82.05

Today’s calendar and market movers:

• § Germany Trade Balance in December is forecasted to fall to 12B
• § UK Goods Trade Balance in December is forecasted to fall to -8.6B

Equity Markets:

US equities were positive on Tuesday with the S&P500 trading up 0.42% and the DJIA trading up 0.59%. The European bourses are also positive with the FTSE trading up 0.67%, the DAX trading up 0.54% and the CAC up 0.43%. The NIKKEI and the HSI at the time of writing are trading down 0.17% and down 0.64% respectively.

Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. This report is provided by Easy-Forex® for informative purposes only. In no way it is a recommendation by Easy-Forex® for you to engage in any trade. It is your sole responsibility and you will have no claims with regards to this report against Easy-Forex®. If you do not agree to this, you are strongly advised not to use this report. Hence, Easy-Forex® shall not be held responsible for any outcome of trading decisions, in regards with this report or similar reports.

Written by Easy-Forex

EU Morning Report- Euro edges higher as risk appetite heals is an article from:

The Euro (EUR) a dip below 1.3800 found support and the major closed back above the figure. EUR/GBP selling weighed as the Pound outperformed and most traders are now turning their attention to the ECB meeting and President Trichet’s Press Conference. EUR/USD traded with a low of 1.3766 and a high of 1.3863 before closing at 1.3810. Looking ahead, ECB Rate Announcement forecast at 1.0%.

The Japanese Yen (JPY) was able to bounce back slightly from Y81.40 to highs in the US session on stronger US ADP Private Jobs report. The market is still bearish on the Major but most crosses are well supported and this is creating a very stable USD/JPY. Overall the USDJPY traded with a low of 81.35 and a high of 81.88 before closing the day around 81.55 in the New York session.

The Sterling (GBP) was the strongest currency in the market as traders reacted to a very solid January Construction PMI at 53.7 vs. 49.8 previously. GBP/JPY moved above Y132 and EUR/GBP fell back towards 0.8500. Overall the GBP/USD traded with a low of 1.6126 and a high of 1.6234 before closing the day at 1.6195 in the New York session.

The Australian Dollar (AUD) had a bout of profit taking but still ended the day on the front foot with traders still taking a shine to the commodity currency. Cyclone Yasi hit the northern part of Queensland but fortunately missed the major cities and damage was limited. Overall the AUD/USD traded with a low of 1.0054 and a high of 1.0136 before closing the US session at 1.0105. UPDATE December Trade Balance at 1.9bn vs. 1.6bn forecast.

Oil & Gold (XAU) struggled to make any gains and fell back towards the bottom end of its recent range finding support under $1330 . Overall trading with a low of USD$1326 and high of USD $1343 before ending the New York session at USD$1333 an ounce. Was well supported as the Egypt violence flared up causing supply concerns. WTI Oil Closed +$0.25 at $90.90 a barrel.

TECHNICAL COMMENTARY

Euro – 1.3810

Initial support at 1.3690 (Feb 1 low) followed by 1.3571 (Jan 31 low). Initial resistance is now located at 1.3948 (76.4% retrace of 1.4282-1.2867) followed by 1.4000 (Big Figure Resistance)

Yen – 81.60

Initial support is located at 80.93 (Jan 3 low) followed by 80.54 (Nov 9 low). Initial resistance is now at 82.15 (Feb 1 high) followed by 83.22 (Jan 27 high).

Pound – 1.6190

Initial support at 1.6059 (Jan 18 high) followed by 1.6010 (Feb 1 low). Initial resistance is now at 1.6253 (76.4% retrace of 1.6878-1.4231) followed by 1.6299 (Nov 4 High).

Australian Dollar – 1.0115

Initial support at 0.9964 (Feb 1 low) followed by the 0.9867 (Jan 31 low). Initial resistance is now at 1.0149 (76.4% retrace of 1.0256-0.9804) followed by 1.0171 (Jan 4 high).

Gold – 1334

Initial support at 1323 (Jan 31 low) followed by 1308 (Sep 28 low). Initial resistance is now at 1353 (Jan 24 high) followed by 1371 (Jan 20 high).

Oil – 91.20

Initial support at 90.00 (Intraday Support) followed by 89.50 (Intraday Support). Initial resistance is now at 91.50 (Intraday Resistance) followed by 92.50 (Intraday Resistance).

Written by Anthony Darvall

Written by Easy-Forex

Daily Outlook – EURO Strong ahead of ECB Meeting is an article from:

The Dollar was mixed under pressure most of the week until a dramatic stock market fall on Friday sent the dollar higher on save haven flows. Concerns of a possible revolution in Egypt saw Oil soar on supply problems and stocks sink on contagion risk to other middle eastern countries. The FED’s FOMC met and held rates at 0.25% whilst also signaling QE2 would continue as planned. The Euro spent most of the 2week at the 1.3700 level before falling sharply on Friday below 1.3600 on Egyptian fears. Sentiment towards the Eurozone and the Euro have improved markedly in recent weeks on expectations that the ECB will find new solutions to the debt crisis. The EUR/USD fell -0.07% closing at 1.3610, after opening the week at 1.3620.

The Japanese Yen was volatile being sold aggressively mid-week when S&P downgraded Japan on there fiscal plan. The move above Y83 was short-lived however with risk aversion sending the major and crosses aggressively lower during Friday’s stock market rout. The USD/JPY fell -0.52% closing at 82.12, after opening at 82.55. The GBP was under heavy pressure due to the shock Q4 GDP print during the week. Q4 GDP was forecast at 0.5% came in at -0.5% and saw the Pound sold across the board. Adding to the pressure was risk aversion Friday and the Pound finished on a weak footing. The GBP/USD fell -0.88% closing at 1.5858 after opening at 1.5997. The AUD was under pressure Friday as the traditional risk currency tracked stock markets lower as Egypt protests grew. On Tuesday, CPI was released much lower than expected at 0.4% vs. 0.7% forecast and helped to pare back expectations of more central bank rate hikes this year. The AUD/USD gained 0.11% closing at 0.9896 after opening at 0.9885.

The Forex Trading Week Preview

In the States; On Monday, January Chicago PMI forecast at 65 vs. 66.8 previously. Also released, December Personal Spending is forecast at 0.5% vs. 0.4% previously. On Tuesday, January ISM Manufacturing is forecast at 58 vs. 58.5 previously. On Wednesday, January Unemployment ADP Employment Change forecast at 150k vs. 297k previously. On Thursday, Weekly Jobless Claims are forecast at 420k vs. 454k previously. Also released, January ISM Services forecast at 57 vs. 57.1 previously. Fed Chief Bernanke Speaks. January NonFarm Unemployment Change forecast at 136k vs. 103k. Unemployment Rate forecast at 9.5% vs. 9.4%. We will provide our previews and reviews of these data releases in the daily summary.

In the Eurozone; January CPI forecast at 2.4% vs. 2.2% previously. On Tuesday, German Unemployment forecast at 7.5%. Also ECB President Trichet Speaks. On Thursday, ECB Rate Annoucement forecast unchanged at 1.0%. On December EU Retail Sales forecast at 0.2% vs. 0.3% previously. On Friday, EU Leaders Summit Begins. In the UK, On Tuesday, January PMI Manufacutring is forecast at 57.9 vs. 58.3 previously.  On Wednesday, PMI Construction forecast at 48.9 vs. 49.1 previously. On Thursday, PMI Services forecast at 50.5 vs. 49.7 previously. We will provide our previews and reviews of these data releases in the daily summary.

In Japan; No major data this week. In Australia; On Tuesday, RBA Rate Announcement is forecast unchanged at 4.75% but focus will be on the accompanying statement. On Thursday, New Zealand Unemployment Rate is forecast 6.5% vs. 6.4%. On Friday, December Trade Balance forecast at 1600mn vs. 1925mn previously. We will provide our previews and reviews of these data releases in the daily summary.

TECHNICAL COMMENTARY

Euro – 1.3580

Initial support at 1.3573 (Jan 25 low) followed by 1.3541 (Jan 24 low). Initial resistance is now located at 1.3758 (Jan 27 high) followed by 1.3825 (Nov 10 high)

Yen – 82.20

Initial support is located at 81.89 (Jan 5 low) followed by 81.61 (Jan 4 low). Initial resistance is now at 83.22 (Jan 27 high) followed by 84.11 (Dec 20 high).

Pound – 1.5830

Initial support at 1.5702 (50 % retrace of 1.5345-1.6059) followed by 1.5618 (61.8% retrace of 1.5345-1.6059). Initial resistance is now at 1.6017 (Jan 25 high) followed by 1.6059 (Jan 18 High).

Australian Dollar – 0.9870

Initial support at 0.9864 (Jan 24 low) followed by the 0.9753 (Dec 8 low). Initial resistance is now at 1.0009 (Jan 20 High) followed by 1.0077 (Jan 19 high).

Gold – 1343

Initial support at 1300 (Round Number) followed by 1290 (Intraday). Initial resistance is now at 1353 (Jan 24 high) followed by 1371 (Jan 20 high).

Oil – 90.50

Initial support at 90.00 (Intraday Support) followed by 89.50 (Intraday Support). Initial resistance is now at 91.50 (Intraday Resistance) followed by 92.50 (Intraday Resistance).

Written by Anthony Darvall

Written by Easy-Forex

Weekly Outlook – Risk On, Risk off, Middle East Focus is an article from: