Forex Trading

Forex markets traded in narrow ranges in the overnight session as traders saw past the immediate data docket, looking for tomorrow’s FOMC policy announcement to guide risk sentiment and set the directional bias for the US Dollar and major currencies. May’s OECD Economic Activity Outlook for the Euro Zone may shake things up ahead if it mirrors the World Bank’s recent pessimism.

Key Overnight Developments

• Japan’s Trade Surplus Swells as Drop in Imports Tops Expectations
• US Dollar Range-Bound as Forex Market Eyes FOMC Announcement

Critical Levels



The Euro kept to a narrow 40-pip range in the overnight session, oscillating below 1.41. The British Pound followed suit, trading in a 50-pip band above 1.6420.

Asia Session Highlights



Japan’s Merchandise Trade Balance grew more than economists expected, printing at 299.8 billion yen in May from 69 billion in the previous month. Forecasters were calling for a 210 billion yen result ahead of the release. Notably, the uptick in the headline figure came courtesy of a steep decline in inbound shipments that outpaced the drop in overseas sales, painting a grim picture of the spending climate in the world’s second largest economy. Imports fell -42.4% in the year to May, printing within a hair of the 22-year record drop of -43% registered in February. Looking ahead, the headline figure may continue to grow as companies acclimate to lower global demand. Minutes from the last Bank of Japan policy meeting saw policymakers note that exports will “level out…mainly due to progress in adjustments in local inventories” while consumption (including that of imported goods) remains weak as the “employment and income situation becomes increasingly severe.”

Euro Session: What to Expect



The Euro Zone Current Account deficit may narrow for the sixth consecutive month in April, but looking beyond the headline figure reveals a picture that is hardly encouraging for the currency bloc’s economic prospects. The trade portion of the metric released last week saw the deficit narrow more than economists expected and the capital side of the equation also seems supportive: Euro Zone countries’ stock exchanges rose 15.4% on average in April while benchmark 10-year bonds from Germany, France and Italy (the bloc’s top three economies) added an average of 2.3%.

That said, the improvement in the Euro area’s trade position came as the fall in imports (-2.7%) outpaced that of exports (-1.3%), an ominous sign that suggests home-grown spending is relatively weaker than overseas demand. Private consumption is the largest component of overall economic growth so the latest trade data may be hinting that the Euro Zone will lag behind its main trading partners in seeing a meaningful recovery from the current downturn.

This is not to say the Current Account deficit will necessarily continue to contract: support from capital flows may prove fleeting if risky assets reverse course as traders see stocks as overvalued relative to future earnings given the increasingly negative global growth outlook, sinking top European exchanges. May’s edition of the OECD Economic Activity Outlook may prove to be a near-term catalyst in this regard if the report mirrors the tone of last week’s World Bank forecast which downgraded their Euro Zone forecast to call for a -4.5% drop in GDP this year, an outlook that is nearly twice as worse as the Bank’s previous call for a -2.7% contraction reported in March. On balance, a survey of economists conducted by Bloomberg forecasts that the current account deficit will slice 1.5% off GDP in 2009, the most in 9 years, and take off another 1.2% in 2010.

Barring significant surprises in the upcoming economic data, near-term price action is likely to remain subdued in European hours as in the Asian session as traders look for tomorrow’s FOMC policy announcement to guide risk sentiment and set the directional bias for the US Dollar and major currencies.

Written by Ilya Spivak, Currency Analyst
Article Source - Forex Markets Range-Bound, Looking to FOMC to Guide Risk Sentiment (Euro Open)

The US Dollar has made some solid gains this week following news from the World Bank (WB) that economic forecasts for growth in 2009 are showing a 2.9% contraction, as opposed to the previous forecasts of 1.7%. As political turmoil in Iran and the show-down with North Korea continue, investors have felt a slight drop in confidence in markets lately and pulled their investments back into safe-havens such as the USD and JPY, which explains their sudden rise in value yesterday. This move back to less risky investments appears to be continuing today.



USD - USD Gains on Return to Risk Aversion

The U.S. Dollar gained against its riskier counterparts Monday after the World Bank issued a poor forecast for 2009. Renewed concerns over the state of the global economic recovery combined with unfolding instability in Iran and North Korea brought back an air of pessimism pushing investors to safer currencies. The Dollar was at $1.3856 per EUR following a 0.5% gain since Friday and at 95.99 Yen down from 96.23.

The World Bank predicted Monday that the global economy will shrink 2.9% in 2009, much deeper than the previous estimate of 1.7%. Doubts were also raised that developing countries will be able to spur global economic recovery as their GDP is expected to grow only 1.2% in 2009. The prospect for world economic recovery is expected to be slow and shallow. The report led to a decline in equity markets and commodities which further helped strengthen the Dollar.

The biggest risk to the Dollar this week is the highly anticipated Federal Open Market Committee (FOMC) meeting that is set to begin today and concludes Wednesday with a policy statement. Existing Home Sales are set to be released at 2:00 GMT; however, most of the focus will still be on the outcome of the FOMC meeting as investors await announcements regarding the Fed's Treasury buying program and direction of interest rates.

EUR - EUR Loses against Most Currency Pairs

The EUR lost against its major currency pairs Monday as investors returned to risk aversion after a disappointing report from the World Bank. The EUR traded at $1.3856 Monday down from $1.3948 and at 133.05 Yen down from 134.22 Friday.

Additional pressure to the EUR came after European Central Bank (ECB) President Jean-Claude Trichet stated that he has no intention of offering stimuli to the Euro-Zone economy. A slightly stronger than expected rise in the German Ifo Business Climate had a very short and mild effect on the EUR considering Germany's budget deficit shortfalls made this boost in optimism appear muted.

Despite some interesting economic data set to be released today, including the German Flash Manufacturing PMI and the German Flash Services PMI, both to be released at 7:30 GMT, the markets are awaiting the FOMC meeting statement and ECB's one-year refinancing operation, both due on Wednesday.

JPY - Political Turmoil Benefits JPY

The Japanese Yen gained against most major currencies Monday as risk aversion returned amid political unrest in Iran and a gloomy report from the World Bank regarding expected global recovery. The report stated that the recession will be deeper than previously forecasted, pushing investors to safer currencies, such as the Dollar and Yen.

The Yen traded at 132.87 per EUR following a 0.9% increase yesterday and was at 95.86 per Dollar, after rising 0.4%. Economic data released earlier showed an improvement in the business sentiment index as well as an improvement in the services sector, providing a brighter outlook for Japan's economic state. As the world turmoil continues, it is likely the Yen will extend its gains during today's session as well.

Crude Oil - Crude Oil Drops below $67 a Barrel

The price of Crude Oil dropped more than $2 a barrel yesterday after the World Bank estimated the world economy will contract 2.9% in 2009. A rebounding Dollar also put pressure on Oil as investors moved away from riskier assets and into safe-haven currencies.

Declining expectations of a recovery in U.S summer gasoline demand along with reports of sharp increases in inventories snapped Crude's recent rally. Gasoline demand usually peaks during the summer in the U.S, but in light of the continuing recession and growing unemployment there are less commuters and fewer vacation plans. Furthermore, since refiners are operating at roughly 86% of capacity, even with a sharp increase in demand, gasoline supplies are unlikely to tighten further. There is expectation that the U.S. gasoline inventories will keep rising.

Although some correction is expected, investors are awaiting the release of the U.S Crude Oil Inventories on Wednesday at 14:30 GMT and the FOMC statement to be released 18:15 GMT.

Article Source - World Bank Forecast Returns Traders to Safe-Havens