Euro Hits Five Month High

The euro to dollar rate hit $1.41 as the perception that the global recession is easing sent investors in search of higher yielding currencies. The greenback also fell against the Aussie and Kiwi dollars after South Korea announced that its state pension fund would purchase fewer US Treasuries. Concerns about skyrocketing deficits in the US also put pressure on the dollar and affected global currency exchange rates.

Rising US Deficits Pressure Dollar

Some currency experts believe that rising US deficits could affect the safe haven relationship of the US dollar. At present the US needs to fund a $1.8 trillion deficit which is putting a lot of pressure on the dollar. Alan Ruskin of RBS Greenwich Capital stated, “There’s a visceral concern about the debasement of the U.S. currency because the United States has a lot of debt to finance.” He also stated that the weak US dollar is driving the price of oil, which is priced in dollars, upwards leaving investors betting that “emerging markets will lead the way to recovery.”

Aussie and Kiwi Dollars Big Winners

Two big winners were the Australian and New Zealand dollars both of which rose against the US dollar. The US dollar is currently at an eight month low against both currencies as investors seek higher yielding assets. Global sticks are at their highest in 2009, affecting currency exchange rates and driving investors to riskier investments. Audrey Childe-Freeman of Brown Brothers Harriman said, “It’s driven by equities looking stronger and as a result of that the dollar is losing momentum… people are buying into the ‘worst is behind us’ story.”

Japan’s Industrial Production Rises

The yen to dollar rate rose as industrial production in the world’s second largest economy rose to the highest levels in 56 years. The yen to dollar exchange rate fell 1.2 percent to 95.77 yen. The yen to euro rate declined 1.5% as Japanese forex investors sought higher yielding investments abroad. Rising risk appetite has triggered a flight from dollar denominated assets and most currency specialists expect this to continue in the near future.

US Housing Data Supports Safe Haven appeal of the Dollar

The dollar to euro rate rose after concerns of a US credit downgrade faded into the background and US housing data suggested that the housing market has yet to bottom out supported the safe haven appeal of the dollar. The pound to dollar rate rose to $1.60 a seven month high for the pond. The pound was bolstered by improvement in the British economy and banking sector.

Euro Hits $1.40

Last week the dollar fell on concerns that massive US deficits endangered the US’s AAA credit rating. The euro reached a multi month high of $1.40 but gains were pared by concerns about the German banking sector. Boris Schlossberg of GFT Forex stated that the recent gains of the euro “were driven not by any organic demand for euro but by fear of a possible U.S. downgrade. That’s why $1.40 has been such a cement ceiling for the euro — the fear trade has run out of gas.” In recent trading sessions the euro to dollar traded at $1.3885, a decline of 0.7%.

US Treasury Auction Well Received

Currency exchange rates were also affected by the well received US Treasury auction of US Treasury notes. $35 billion in new five-year Treasury notes were snapped up by investors and the $40 billion of two year notes drew solid demand from investors. Steven Butler of Scotia Capital in Toronto had this to say about the results of the auction, “The two-year auction was great, the five-year was OK, but we won’t know if things are OK or not until we get the 10-year, as the further you go out in duration, the more critical it is that the U.S. can get funding.” The US Treasury will auction 10 year notes in June.

Recovery a Long Way Off

Currency exchange rates have been affected by the perception that the worst of the global recession is over but many economists warn that recovery is a long way off with more bad news expected.

China Largest Holder of US Debt

Since the end of World War Two China has achieved astounding growth. China recovered from the devastation of the war and survived the excesses of the Maoist regime. China is now a modern industrialized nation with a thriving industrial sector. At present China is the largest holder of US debt. The actions of the Chinese government have had an affect on global currency exchange rates and now China is suggesting that its currency, the Yuan, could become a reserve currency.

Chinese Alarmed by Mounting US Debt

The Yuan has gained 21% against the US dollar since China dropped the Yuan’s fixed currency exchange rate in 2005. Despite the gains Chinese officials are alarmed at mounting US debt during the current global recession. For the Chinese the possibilities of a devalued US dollar seem very real. Last March China urges the g 20 nations to adopt a “super-sovereign reserve currency.”

Yuan Kept Artificially Low

Many believe that the Yuan has been kept artificially weak to give China a trade advantage. A Chinese official said that by 2020 the Yuan could make up 3% of global currency exchange reserves. In Hong Kong a pilot program will start using the Yuan to trade with companies in Guangdong province. China has arranged Yuan swap deals with six central banks totaling 650 billion Yuan ($95 billion USD)

Yuan Could Displace Japanese Yen

At present the idea of the Yuan as a reserve currency is mostly speculative but given China’s industrial power the idea should be taken seriously. Should the Yuan account for more than 3% of global reserves it would become possible for the Yuan to displace the Japanese Yen as fourth largest currency putting the Yuan behind the pound, euro, and the US dollar. Zhang Guangping, vice-head of the Shanghai branch of the China Banking Regulatory Commission stated, “We have the conditions to reach such a proportion.”

Risk Appetite Halted

The rise in risk sentiment of the past two weeks came to a halt late last week as negative data from the Euro Zone sent investors to the safety of the US Dollar and the Japanese Yen. Last Friday the dollar closed slightly up against other currency pairs and is expected to continue this momentum into this week. Also affecting dollar exchange rates is the decision by China to purchase more US Treasury Notes.

Negative Euro Zone Data

The euro to dollar exchange rate was affected by various reports from countries in the European Monetary Union which showed that national and regional economies across the Euro Zone suffered from deeper economic decline than was forecast. Euro Zone economic fundamentals are perceived as weak with no immediate end in sight. The weakness means that many regions in the Euro Zone are not able to produce jobs and manufacturing to remain competitive in the global forex marketplace.

Yen Makes Comeback

The Japanese yen has made a comeback after slipping in the last few weeks. In recent trading sessions the yen has outperformed most major currencies. The yen to dollar exchange rate has risen to 94.80, the highest since mid March. The yen to euro exchange rate climbed to 127.30, the highest since late April. The yen to dollar and the yen to euro exchange rates will most likely be affected by two important reports from Japan.

Japanese Economic Reports Due This Week

On Tuesday the Japanese Cabinet Office will release data that is expected to show that Japan’s GDP may have declined 4.2% in the first quarter of 2009. Also expected is a Bank of Japan decision on short-term interest rates. Since the BOJ rates are currently at 0% a reduction is impossible but the decision could indicate future monetary policy.

For the remainder of the week most traders expect currency exchange rates to be affected by equity markets. Most expect the US dollar rally to be sustained through the week.

Dollar at Four Month Low

The dollar fell to a four month low as investors remain confident that the worst of the global recession is past. The optimism has put pressure on the dollar and reduced safe haven demand. The euro to dollar exchange rate hit a seven week high above $1.37. Many experts are pointing to positive economic data such as rising UK retail sales, and industrial production as signs the recession may be changing course. Matt Esteve of Tempus Consulting in Washington stated, “We’ve passed the worst in the recession. We’re not necessarily moving into growth yet, but at least the pace of deterioration has slowed.”

No Need For ECB to Expand Asset Purchases

The euro got a boost after ECB Governing Council member Axel Weber said that there was no need for the ECB to expand its asset purchase program. While the euro rose against the dollar the euro to yen rate fell 0.6% to 131.56 and the yen to dollar rate was 96.46, a decline of 1.1%. The dollar has declined 3.5% in the last four trading sessions.

The ‘Green Shoots’ Theory

Recent signs of economic recovery have been dubbed ‘green shoots’ and have affected currency exchange rates in recent trading sessions. The recent rally has benefited the euro and other major currencies as safe haven demand declines and investors seek higher yielding assets. Michael Woolfolk of the Bank of New York Mellon stated, “The market seems comfortable with the ‘green shoots’ rally and buying riskier assets. Until this slows, there is no reason to remain long the safe-haven dollar…even against the low-yielding yen.”

US Consumer and Producer Figures Due

Wednesday’s US retail sales data and readings on U.S. producer and consumer prices, scheduled for Thursday and Friday are expected to affect currency exchange rates. Optimism about the global economy has caused higher yielding currencies such as the Aussie and Kiwi dollars. Experts believe that the ‘green shoots of recovery’ theory to dominate this week’s trading sessions.

Better Than Expected US Jobs Data

Better than expected US jobs data has raised recovery hopes and triggered risk appetite putting pressure on the euro to dollar exchange rate. US data showed that the US lost 539,000 jobs in April, an improvement over March’s 699,000 job losses in the US. The US currently has an unemployment rate of 8.9%, a 25 year high.

Dollar at Six Week Low

Although the US figures pared some optimism, other economic data released during the week kept risk sentiment high affecting currency exchange rates. On Friday the dollar fell to a six week low against other major currencies. Melvin Harris of Advanced Currency Markets stated, “The market is positioning for recovery over the next few months, which means the dollar will clearly see considerable weakness as this plays out.”

Canadian Dollar Gains

The euro to dollar rate was up 0.8% from Thursday and the euro traded at $1.3505. Many analysts expect this trend to continue. The dollar to yen rate fell 0.3% to 98.91 and the British Pound rose 0.4% to $1.5095. The US dollar fell against the Canadian dollar as Canada reported an unexpected increase in jobs in April.

ECB Decisions

The euro to dollar exchange rate was also affected by the ECB’s decision to boost sluggish credit markets by purchasing covered bonds which are backed by a pool of assets on a bank’s balance sheet. Forex investors and traders hope the move will improve the troubled Euro Zone economy. Addressing the sluggish economy Nicole Elliott of Mizuho Corporate Bank stated in a note to clients, “While the economy may be getting worse at a slower rate, it is still in recession and unemployment is rising. Elliott also said that recovery will take a significant amount of time.

The results of US bank stress tests revealed no surprises and affected currency exchange rates as stocks rallied and investors sought out higher yielding currencies. Weekend trading will likely be dominated by risk appetite.

BOA May Need $34 Billion

The result of US bank stress tests is seen as a major factor affecting the US dollar exchange rate. A story circulated by the news media stating that banking giant Bank of America may need an additional $34 billion in capital has been a major factor governing the direction of the US dollar in currency markets.

ADP Report Shows Decreasing US Job Losses

The ADP report which measures non farm payrolls predicted a smaller than expected number of US private sector job losses for April affecting risk sentiment and the US dollar exchange rate. The ADP report was released two days in advance of the official US government non farms payroll report. The ADP report shows that the US shed 491,000 jobs in April. The official Bureau of Labor Statistics report is expected to show job losses of 610,000. Unemployment in the US is currently at 8.9%.

Caution in Advance of ECB Meeting

Although the euro has gained in recent trading sessions those gains have been pared by investor concerns in advance of Thursday’s ECB meeting. Concerns about the results of the ECB meeting combined with worries about US banks have limited gains by the euro and have affected currency exchange rates globally. Losses by the euro are expected to be limited due to increasing risk sentiment among investors and currency traders.

ECB Results Could Pressure Euro

The euro to dollar exchange rate fell from $1.3374 to $1.3300, a loss of 0.2%. Although most believe that the global economy is showing signs of recovery and raising risk appetite many investors remain cautious in advance of the ECB meeting. Should the central bank adopt unconventional measures such as quantitative easing to address the recession the euro would come under pressure affecting the euro dollar exchange rate. Jacob Oubina, strategist at FX.com stated, “With the ECB coming out tomorrow, I’d still favor selling rallies in the euro.”

Should the ECB not adopt unconventional monetary policies, many predict a rally for the euro vs. the US dollar. Investors and forex traders will be watching the ECB intently on Thursday.

Risk Appetite Pressures US Dollar

The perception that the worst of the global recession is over has put pressure on the US dollar and the Japanese yen. In Asia trading is expected to be light as Japan shuts down for its Golden Week holidays. Both the US dollar and the Japanese Yen extended last weeks losses as risk sentiment rises among investors.

European and US Stocks Rally

A rally in both European and American stocks prompted investors to dump safe haven assets in favor of commodities and currencies. Winners included higher yielding currencies such as the Aussie and Kiwi dollars which remain close to recent highs. Greg Gibbs of Royal Bank of Scotland stated, “Credit default swap, emerging market credit and implied volatility indices have fallen to their lowest levels since October. This resiliency in investor confidence suggests the Aussie and the kiwi will rally further in the week or so.”

Volatility in currency markets is expected this week as investors sift through mounds of data from the US, and Europe. Thursday’s meeting of the European Central Bank is expected to affect currency exchange rates especially the euro to dollar. US employment figures are due Friday and some investors remain cautious. Figures are expected to show additional job losses of 630,000 in April. US bank stress tests data will be released Thursday and many investors feel this will have a huge effect on currency exchange rates.

Euro Gains Limited in Advance of ECB Meeting

Euros to dollar gains are expected to be pared ahead of the ECB meeting. The ECB is expected to cut rates to 1% and follow the lead of the Federal Reserve in adopting quantitative easing and asset purchases. Last Friday’s figures from the US that showed consumers upbeat about the economy and a declining slump in manufacturing have affected currency exchange rates and raised risk appetite. Investors will have several economic reports to sort through this week and it is sure to be a busy week on forex currency exchanges worldwide.

Currency Desks

According to the venerable Wall Street Journal 73% of all currency transactions are done by 10 of the world’s largest banks. Most of these banks are well known such as J.P. Morgan, Deutsche Bank, UBS, Citigroup, and HSBC. Most banks participating in the interbank fx market will have a separate section known as the Foreign Exchange Sales and Trading Department. Usually this section will have a trading and sales desk. Interbank fx transactions usually involve three steps; taking orders, getting a quote from a spot trader, and relaying that quote to the client.

The Two Major Trading Platforms

Even though online interbank forex transactions are available many larger traders believe they will get better pricing over the phone and some are concerned about security. Typically interbank forex traders use two trading platforms. One is provided by Reuters and the other is provided by the Electronic Brokerage Service or (EBS). Reuters has a long history of handling large interbank fx trades for large customers. The interbank fx is a credit approved system and depends on interbank relationships. The larger the bank the more credit relationships they have with other banks and can offer better pricing.

Pricing Factors

Interbank fx dealers use a variety of factors to determine pricing. These usually include current market rate, volume available at current price levels, and views on how the currency will perform. Forex brokers with access to large amounts of capital are able to establish credit relationships with interbank FX brokers and obtain competitive pricing for themselves and their clients. A well capitalized forex broker is able to obtain competitive pricing from interbank forex brokers no matter how volatile forex markets get. The ideal situation for the average day trader is to establish a relationship with a well capitalized broker with access to interbank fx pricing. A forex broker who trades on the interbank forex market has access to proprietary information that can mean the difference between profit or loss.