Forex Today

The prior drop took us precisely down to the 23.6% Fibonacci retracement, which then proceeded to act as resistance for an entire week.  Today’s drop ended at 38.2%, and currently price is taking a breather and slowly retracing back up from there.

1.5415 now remains a key support level to watch.  If price begins to move up, then look to 1.5646 to act as resistance once more.  If price breaks below 1.5415, then look for it to find support at 1.5229, 1.5043, or 1.4778.
 

In preparation for the new trading week, here is a quick look at the most important economic events that every currency trader should pay attention to.

Sunday, May 4 will start the trading session with New Zealand’s Labor Cost Index of inflation in worker’s compensation and wages, at 6:45 pm, ET, followed by the Australian Services PMI- Purchasing Managers Index of the level of activity by purchasing managers in the services sector, at 7:30 pm, ET.

More news from “down under” will bring the first spotlight event of the week- the Australian TD Securities Melbourne Institute Inflation Gauge used a timely indicator of the official quarterly Consumer Price Index, at 8:30 pm, ET.

The day will conclude with the Australian House Price Index of changes in house prices, at 9:30 pm, ET, and New Zealand’s Commodity Price Index of inflation in commodities’ prices, at 11:00 pm, ET.

Monday, May 5 will begin with the Euro-zone Investor Confidence in the economy, at 4:30 am, ET.

The U.S. economic data will deliver one of the main spotlight events of the week- the ISM Non-Manufacturing Index of economic conditions in industries like agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, at 10:00 am, ET. If the Institute for Supply Management Index shows a reading below 50, that would indicate economic contraction.

The day will end with the Australian Trade Balance of the difference in value between imported and exported goods and services, at 9:30 pm, ET.

Tuesday, May 6 will start with one of the major spotlight events of the week- the Reserve Bank of Australia’s Interest Rate Announcement, at 12:30 am, ET.

Another spotlight event- the Swiss CPI- Consumer Price Index, the main measure of inflation, will be released at 1:45 am, ET, followed by the Euro-zone Services PMI- Purchasing Managers’ Index of the level of activity by purchasing managers in the services sector, at 4:00 am, ET, and the U.K. Services PMI- Purchasing Managers’ Index, at 4:30 am, ET.

More news from the Euro-zone will deliver a spotlight event- the Euro-zone PPI- Producer Price Index, the main measure of inflation experienced by manufacturers, at 5:00 am, ET.  

There will be no notable U.S. releases for that day, but important data from Canada will bring the Canadian Building Permits, at 8:30 am, ET, and the Canadian Ivey PMI- Purchasing Managers’ Index of the level of activity by purchasing managers from all sectors of the economy, at 10:00 am, ET.

The closely watched U.K. Consumer Confidence in economic conditions, at 7:00 pm, ET, will warp up the day.

Wednesday, May 7 will begin with the U.K. Industrial Production, measuring the physical output of the nation’s factories, mines and utilities, at 4:30 am, ET.

A spotlight event will hit the newswires with the release of the Euro-zone Retail Sales, the main gauge of consumer spending, at 5:00 am, ET, followed by the U.K. BRC- British Retail Consortium Shop Price Index, measuring the rate of inflation experienced by retailers, at 5:30 am, ET, and the German Factory Orders, at 6:00 am, ET.

The U.S. economic data sequence will begin with a spotlight event- the U.S. Non-farm Productivity and Labor Costs Index, measuring the growth of labor efficiency and the level of inflation in worker’s compensation and wages, at 8:30 am, ET.

The U.S. news will continue with the U.S. Pending Home Sales Index, at 10:00 am, ET, and the EIA- Energy Information Administration Weekly Oil Inventories, at 10:30 am, ET.

The day will conclude with New Zealand’s Unemployment Rate and Employment Change, at 6:45 pm, ET, and the Australian Employment Situation Report, measuring the unemployment rate and the number of paid employees working part and full-time, at 9:30 pm, ET.

Thursday, May 8 will start early with the Swiss Unemployment Rate at 1:45 am, ET, the German Trade Balance, at 2:00 am, ET, and the German Industrial Production, measuring the physical output of the factories, mines and utilities in the Euro-zone’s largest economy, at 6:00 am, ET.

Two of the main spotlight events of the week will follow- Bank of England’s Interest Rate Decision at 7:00 am, ET and the European Central Bank’s Interest Rate Decision at 7:45 am, ET. No rate changes are expected from both of these central banks.

After the interest rate announcements, the U.S. Weekly Jobless Claims and the Canadian Housing Starts will be released at 8:30 am, ET.

Another important event that morning will be the European Central Bank’s President Jean-Claude Trichet speech at 8:30 am, ET at the press conference in Frankfurt following the ECB Governing Council’s interest rate decision. The language of the statement will be very closely watched for any hints of future changes in the ECB’s monetary policy.

More U.S. data will bring the U.S. Wholesale Inventories, at 10:00 am, ET, the EIA- Energy Information Administration Weekly Natural Gas Inventories, at 10:30 am, ET, the U.S. Chain Store Sales, at 12:00 pm, ET, and the U.S. Money Supply by degree of liquidity, at 4:30 pm, ET.

The day will end with the Reserve Bank of Australia’s Monetary Policy Statement on economic growth, inflation and the future monetary policy, at 9:30 pm, ET.

Friday, May 9 will begin with the Japanese Leading Index of economic conditions, at 1:00 am, ET, and the French Industrial Production of the Euro-zone’s second largest economy, at 2:45 am, ET.

The last spotlight event of the week will come from Canada with the release of the Canadian Employment Report, measuring the unemployment rate and the number of paid employees working part and full-time, at 7:00 am, ET, followed by the Canadian Trade Balance, at 8:30 am, ET.

The U.S. International Trade Balance, a measure of the difference between imports and exports of tangible goods and services, at 8:30 pm, ET, and the U.S. CASH- Consumer Attitudes and Spending by Household Index, a monthly national survey of consumer attitudes on the current and future state of local economies, personal financial situations, savings, and confidence to make large investments, at 9:00 am, ET, will wrap up the trading week.

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The dollar ended the month of April in choppy or aggressive conditions, depending on the currency pair. It rallied versus the European and the commodity currencies, while reversing gains to close flat against the yen. The Federal Reserve met the market expectations and cut its rates by 25 bps and the dollar should now see more pressure. With the continental Europe closed for May Day, trading should be subdued.

Euro/dollar

Euro/dollar reversed from its lowest level since April 3 to close higher on Wednesday. My model remains short, but the upside risk should continue to Friday. Immediate resistance is at 1.5645. A break above it would signal a more aggressive recovery to 1.5690. Distant resistance is at 1.5790. Initial support is at 1.5570. The next level is 1.5480. Distant support is 1.5355.

Oscillators are falling.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Dollar/yen

Dollar/yen fell from a two-month high to close basically flat on Wednesday as well. The pair remains in an uptrend, my model is long, but the immediate outlook is still mixed. Immediate resistance is at 104.50 from a 50-point pivot, which targets 104.00 and 105.00. The next levels remain at 105.20 and 105.60 from a 50-point pivot that targets 105.10 and 106.10. Strong support s pegged at 103.40 from a 50-point pivot, which targets 102.90 and 103.90.

Oscillators are rising.

NEAR-TERM: Mixed
MEDIUM-TERM: Mixed to slightly bullish
LONG-TERM: Bearish

Sterling/dollar

Sterling/dollar surged from a two-month low to erase most of its Tuesday’s losses. My model now went long. The upside is limited. Initial resistance is at 1.9923 from a declining line. Above 2.0025, strong resistance is now pegged at 2.0190. Strong support comes at 1.9757. Distant support is at 1.9597.

Oscillators are mixed.

NEAR-TERM: Mixed
MEDIUM-TERM: Mixed
LONG-TERM: Mixed

Dollar/Swiss franc

Dollar/Swiss fell from a near two-month high to close lower on Wednesday. Unfortunately, choppy trading is expected today as well. Immediate support is now seen at 1.0300. The next level remains at 1.0260. This is followed by 1.0185. Support is then pegged at 1.0135. Initial resistance still comes at 1.0400. The next level is 1.0440. This is followed by 1.0550. Distant resistance now comes at 1.0625.

Oscillators are rising.

NEAR-TERM: Mixed
MEDIUM-TERM: Mixed
LONG-TERM: Bearish

Carry trading, which has put the Swiss franc and the yen under pressure while it has benefited higher-yielding currencies, should make up a considerable portion of every investors’ foreign exchange portfolio. Joe Prendergast, head of Foreign Exchange Research at Credit Suisse explains why.

Dorothée Enskog: The Swiss franc and the yen have been pretty weak over the past two years due to carry trading. Could you explain what carry trades are?
Joe Prendergast: Carry trading involves the borrowing of, or selling of a low-yielding currency and buying of a higher yielding currency. It is a very well established strategy in foreign exchange. Because we’ve had pretty quiet markets and relatively low market volatility in recent years, that strategy continues to grow in favor.

Joe Prendergast, 
head of Foreign Exchange Research at Credit Suisse

Who is behind these carry trades?

It’s actually a pretty broad range of investors who are involved in this type of cross-country carry trading; from a private individual, to a hedge fund or a large institutional investor. One must note that these groups tend to execute the trading in a slightly different way.

Would you recommend an average investor to invest in carry trades?
Carry trading is very attractive as a theme, and of course it’s not new. In the last 30 years there has been a tremendous amount of academic literature supporting the idea that the return on offer to the carry trader - the excess interest rates in a foreign country over your own - does on average tend to more than compensate for the currency risk. As part of a portfolio of strategies, we would certainly recommend that this be part of any investor’s themes.

How big should this proportion of carry trades be in a portfolio?

That very much depends on the individual investor and also depends on the amount of time the investor wishes to spend on the portfolio. Carry trading is a default position in terms of currency trading, meaning it should be a fairly large component of a currency position, unless you are going to be a very active investor and spend a tremendous amount of time on macro research or technical analysis.

Can investors expect above-average return thanks to carry trades?
Historically, we’ve seen carry trading in foreign exchange deliver very strong returns over time, occasionally characterized by some draw downs as we see at this moment in time. However, those draw downs have often offered the best opportunities to enter into carry trading. It’s actually much more preferable to enter at times of market volatility, than at times of extreme market euphoria or complacency. We are speculating when answering the question, but we would certainly expect from this vantage point, carry trading to deliver very positive returns going forward.

Which are there currencies which have weakened due to carry trades?

The Swiss franc and the yen certainly both have suffered in recent year from the fact that they have relatively low interest rates. How much of that is down to speculative carry trades is certainly debatable. In the case of Japan we’ve seen lots of domestic capital outflow in reaction to the normalization of the financial system after the crisis of the past decade or so. That is not really speculative carry trading as we would define it. There’s definitely been some element of carry trades, but there is also significant fundamental macroeconomic support for the softness of both currencies.

Could you cite a few currencies which have benefited from carry trades?

The higher yielding currency block - the Australian and New Zealand dollar, the British pound and across to the Brazilian real or Turkish lira - have all strengthened in recent years largely due to their relatively high yields. This of course continues to be a support for those currencies, even if the interest differential has come down in recent years.

Can we say that investors are unwinding their carry trades now, when the stock markets are tumbling, and that is the reason the franc and the yen have been appreciating in the past week?
Yes, the market activity we see right now reflects some generalized unwinding of risk which would include carry trading, as much as any other risky or speculative activity. Both the Swiss franc and particularly the yen have appreciated significantly, all be it from very weak levels by historical standards.

How much could the Swiss franc and the yen still appreciate?

The franc and the yen could still gain a little bit further in the near term, if we continue to observe risk reduction. They are the two currencies that would continue to see some benefit in that environment. But we don’t think we’ll see very significant further gains, because the backdrop globally is favorable to risk absorption throughout the year. The still low interest rates, even they though may rise in both countries, will continue to make them attractive as funding vehicles for the medium-term.

Still much scope for hedge fund to unwind their carry trades?

There are certainly carry trades still in existence, meaning these could be unwound. But when you look at what has truly changed in the market environment in the year to date, what we see is the unwinding of some of the market euphoria we had in January. Back then, the market had a very complacent behavior. That vulnerable bit has now unwound. We don’t expect really significant further unwinds from here, though there is no doubt there will still be some. We don’t think the unwinding of carry trades will be a generalized medium-term phenomenon of risk reduction.

How about the U.S. dollar and the euro?  How do you see them developing during the course of 2007?
The euro versus dollar has been relatively stable throughout this market volatility. Throughout the past year, Credit Suisse expected the dollar to hold up quite well supported by relatively high interest rates. What we’ve seen in recent months is a quite significant deterioration of the interest differential in the U.S.’s favor. That has contributed to some dollar softness that we didn’t anticipate. But the dollar held up quite well in the market movements of the past week, while the euro has perhaps suffered disproportionately. That reflects the fact that the euro was on the long-side of several carry positions out of yen built up over the last year or two. We think that the dollar will hold up fairly well in the current market environment, supported by relatively high interest rates. But it may not do as well as we would have thought it might last year.

There are two basic strategies that are used when trading Forex, one is called Technical analysis and one is known as Fundamental analysis. Technical analysis is more often used by private traders than fundamental but in this articles we will look at both these methods and see how they each apply to Forex trading.

If you are of the opinion that establishing the value of a company is a difficult task, then imagine how difficult it is to decided what the value of a country is.

Using Fundamental analysis in the Forex market is very difficult indeed and is normally only done to predict long term trends. There are many private traders however that trade based on the latest news releases and this has been done with varying degrees of succes. There are a lot of fundamental indicators including ;

• Non-farm Payrolls
  
• Purchasing Managers Index (PMI)
  
• Consumer Price Index (CPI)
• See also our list of Market Indicators
  

Retail Sales

It is important to realise that these are not the only reports that you need to be aware of. There are a number of meeting and announcements announcing inflation, interest rates and other issues that affect currency values. One of the really important meetings that you have to watch out for is the Federal Open Market Committee.

By simply reading these reports you can get a better understanding of long term market trends and profit in the short term by looking for special events as a good time to trade.

At eToro we provide our traders with the latest news and events so you will always be up to date with global happenings that can affect your trading.

Technical Analysis

Technical analysis in the Forex market is all about analyzing price trends.technical analysts of the FOREX trading market analyze price trends. Some of the most common forms of technical analysis used in FOREX are:

• The Elliott Waves
  
• Fibonacci studies
  
• Parabolic SAR
  
• Pivot points

A lot of technical analysts tend to combine technical studies to make more accurate predictions on your behalf. Others prefer to create trading systems in an effort to repeatedly locate similar buying and selling conditions.

Deciding on the strategy to use.

Most successful traders develop a strategy and refine it over a period of time. Some people will focus on one particular study or calculation, while still some others use broad spectrum analysis as a means of deciding which trades to make. Most experts are likely suggest that you try using a combination of both fundamental and technical analysis, with which you can make long-term projections and also determine entry and exit points. Of course, in the end, it is up to you, the individual trader to decide what works best for yourself..

When you are ready to try trading in the FOREX market, you should open a Free Demo account and practice until you can make a profit on a consistent basis. Many people who fail have a tendency to jump into the FOREX market and quickly lose a lot of money simple because of a lack of experience. It is important to take your time and learn to trade properly before you start committing resources.

You also need to be ale to trade without emotion and most importantly remember “The Trend is your Friend”