US Dollar to Remain Volatile Ahead of Four Major Rate Decisions and NFPs

FX market volatility is likely to remain high in the coming week as event risk will pick up substantially amidst four major rate decisions. Indeed, the Reserve Bank of Australia, Federal Reserve, Bank of England, and European Central Bank are all expected to make decisions, but only two are expected to make any policy changes.

• Reserve Bank of Australia Rate Decision – November 2, 22:30 ET
According to Bloomberg News and Credit Suisse overnight index swaps (OIS), the Reserve Bank of Australia (RBA) is likely to raise rates for the second straight month by 25 basis points to 3.50 percent. Looking even further ahead, OIS rates are pricing in 192 basis points worth of hikes over the next 12 months. However, as recently as October 20 - the day before AUDUSD hit its 2009 high of 0.9326 - OIS rates were pricing in 216 basis points worth of increases, but have since gradually faded as speculation that the global economy is in the midst of a broad-based recovery have given way to concerns that signs of growth are just temporary. As a result, the RBA’s rate decision and policy statement could prove critical to the AUDUSD outlook in the near-term. While the RBA did leave the door open to further rate increases in their last statement by saying that “it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” the downward pressures on inflation formed by the sharp appreciation of the Australian dollar may prevent the central bank from tightening policy again right away. If this is the case and the RBA leaves rates unchanged at 3.25 percent, the Australian dollar is likely to plunge on the news. On the other hand, a rate increase in line with forecasts could keep the currency within its uptrend.

• Federal Open Market Committee Rate Decision – November 4, 14:15 ET
At 14:15 ET, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case into early 2010. In fact, the FOMC started saying in January that they continue “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” and they’ve gone on to repeat this since then. Furthermore, the last statement highlighted that the Committee's policy focus is to support the functioning of financial markets via quantitative easing (QE) and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. Generally, signs that the central bank may increase Treasury purchases have been negative for the US dollar, but indications that they will complete the program within the next month or so could send the greenback spiraling higher.

• Bank of England Rate Decision – November 5, 7:00 ET
The Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement. This has consistently been the prime “news event” of recent rate decisions. Last month, the BOE indicated a neutral stance as they stated they would continue their £175 billion quantitative easing (QE) program, and this ultimately led the British pound to rally against the US dollar and euro immediately. This time around, though, a Bloomberg News poll is calling for the Monetary Policy Committee (MPC) to expand their QE program by £50 billion to £225 billion following the Q3 reading of UK GDP, which showed that the economy remains in recession, and such a reading would have dire consequences for the currency. However, if the BOE allows the program to expire, the British pound is likely to gain.

• European Central Bank Rate Decision – November 5, 7:45 ET
The European Central Bank is anticipated to leave rates unchanged at 1.00 percent at 7:45 ET. Where the currency ends the day, though, may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Traders will likely focus on any comments regarding the future of interest rates in the region, including whether 1 percent should be considered the “floor,” as well as statements on exit strategies for the central bank’s liquidity programs.

• Canadian, US Employment Report Day – November 6, 7:00 ET and 8:30 ET
At 7:00 ET, the Canadian net employment change for the month of October may rise for the third straight month, this time by 10,000 following an increase of 30,600 in September and 27,100 in August. On the other hand, the unemployment rate is anticipated to have risen to 8.5 percent from 8.4 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a surprise drop likely to weigh on the currency and an unexpectedly strong result likely to push it higher.

At 8:30 ET, the US non-farm payroll index (NFP) is forecasted to show job losses for the twenty-second month in October, though the rate of decline is anticipated to slow. At the time of writing, Bloomberg News was calling for NFPs to decline by 175,000, which would be the smallest drop in just over a year. At the same time, the unemployment rate is projected to remain at 26-year highs by rising to 9.9 percent from 9.8 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view. A better-than-anticipated result is likely to provide a boost to the US dollar, but it will be interesting to see the impact of disappointing results as weak US data tends to weigh on risky assets and push the greenback higher amidst flight-to-quality.

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Forex made easy is as simple as you would want it to be. The foreign exchange market is a worldwide market and according to some estimates is almost as big as thirty times the turnover of the US Equity markets. That is some figure to chew on. Forex is the commonly used term for foreign exchange. As a person who wants to invest in the forex market, one should understand the basics of how this currency market operates. Forex can be made easier for beginners to understand it and here's how.

Foreign exchange is the buying and the selling of foreign exchange in pairs of currencies. For example you buy US dollars and sell UK Sterling pounds or you sell German Marks and buy Japanese Yen. Why are currencies bought or sold? The answer is simple; Governments and Companies need foreign exchange for their purchase and payments for various commodities and services. This trade constitutes about 5% of all currency transactions, however the other 95% currency transactions are done for speculation and trade. In fact many companies will buy foreign currency when it is being traded at a lower rate to protect their financial investments. Another thing about foreign exchange market is that the rates are varying continuously and on daily basis. Therefore investors and financial managers track the forex rates and the forex market it on a daily basis.

Those who are involved in the forex trade know that almost 85% of the trading is done in only US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. This is because they are the most liquid of foreign currencies (can be easily bought and sold. In fact the US Dollar is most recognizable foreign currency even in countries like Afghanistan, Iraq, Vietnam etc).

Being a truly 24/7 market, the currency trading markets opens in the financial centers of Sydney, Tokyo, London and New York in that sequence. Investors and speculators alike respond to the ever-changing situations and can buy and sell simultaneously the currencies. In fact many operate in two or more currency market using arbitrage to gain profits (buying in one market and selling in another market or vice versa to take advantage of the prices and book profits).

While dealing in forex, one should have a margin account. Quite simply put if you have US$ 1,000 and have a forex margin account which leverages 100:1 then you can buy US$ 100,000 since you only need 1% of the US$100,000 or US$1,000. Therefore it means that with margin account you have US$ 100,000 worth of real purchasing power in your hand.

Since the foreign currency market is fluctuating on a continuous basis, one should be able to understand the factors that affect this currency market. This is done through Technical Analysis and Fundamental Analysis. These two tools of trade are used in a variety of other markets such as equity markets, stock markets, mutual funds markets etc. Technical Analysis refers to reading, summarizing and analyzing data based on the data that is generated by the market. While fundamental Analysis refers to the factors, which influence the market economy, and in turn how it would affect the currency trading. Of course there are other economic and non economic factors which can suddenly affect the trading of the forex markets such as the 9/11 tragedy etc. One needs to have a shrewd acumen and a few number crunching abilities to strike gold in the forex market.

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U.S. Job Losses Slowed, Unemployment Rate Declines Signaling Recession Ending

Written by John Rivera, Currency Analyst

The U.S. Non-Farm Payroll report signaled that the recession may be over as the pace of job losses slowed to -247,000 in July which was the least since August 2008. It significantly beat expectations of -325,000 and helped lower the unemployment rate to 9.4% from 9.5% which should ease fears that it could reach as high as 10.0 % by the end of the year.

We also saw the prior month’s loss of 467,000 revised to 443,000 adding to the evidence that companies have slowed the pace of layoffs and could soon return to hiring. Manufacturing jobs declined by 52,000 which was nearly half the expected 100,000 as the sector has found support from increasing foreign demand on the back of the weak dollar and an improving global economy. One of the only sectors to see deterioration was retail trade as consumers continue to tighten their wallets, but a return to hiring in the broader economy could lift domestic demand which should be the catalyst for a sustained recovery. A 0.2% rise in hourly earnings could be a sign that demand for workers is improving, but it will also raise concerns over inflation. Those fears were evident in the subsequent price action as the dollar found support on the prospect of increasing interest rates. The Fed has been very clear that they will remove liquidity from the market as the U.S. economy recovers to avoid rising consumer prices and future bubbles.