Risk Appetite

Both the US dollar and the Japanese Yen have benefited from the extreme risk aversion that has gripped Forex markets throughout the global economic crisis. Forex traders seeking safe haven have flocked to the dollar and the Yen. Occasionally there is a return to risk appetite but it is usually short lived.

Slight Elevation of Risk Appetite

Last week there was a slight return of risk appetite that caused both the dollar and yen to fall slightly. The surprising rise of the British Pound was short lived and risk appetite benefited the Aussie and New Zealand dollars. Forex traders quickly took advantage of new Forex opportunities caused by the slight elevation of risk appetite.

Dismal US Employment Figures

The release of dismal employment figures by the US prompted speculation by Forex traders that Washington will act quickly to pass the stimulus plan proposed by the new Obama administration. The return to risk appetite put pressure on both the dollar and the Yen as Forex traders sought out higher yielding currencies.

Waiting for Obama and Geithner

On Monday, February 9th President Obama and Treasury Secretary are expected to announce details of the proposed stimulus plan and attempt to convince opponents that the rescue package is necessary. Stock markets were up despite Friday’s report that revealed that 580,000 jobs were lost in January. Many Forex traders believe that these figures will convince opponents of the stimulus plan to vote for its passage.

Stimulus Passage Compromise

At present the rescue package is stalled in the Senate but majority leader Harry Reid said he believes that the Senate will ”be able to work something out.” Brian Dolan of Forex.com said, “Right now, investors are looking for the next big thing—fiscal stimulus and a banking rescue.”

On Monday February 9th Forex traders will be watching Washington closely. Most Forex traders believe that the US has been proactive in addressing the economic crisis and most believe that the US will be the first nation to recover from the recession. Hopefully they are right.

BOE and ECB Release Data

Last week was a busy one for Forex traders. Both the ECB and the BOE released new rates and on Friday the US released its job report which showed that more Americans have lost their jobs than at any other time since 1971. A rise in stocks triggered a return of risk appetite causing the Japanese Yen to fall against the Dollar and the troubled Euro.

Forex Traders Still Cautious

Many Forex traders were cautious while waiting for the US jobs report and unemployment in the US is expected to rise to 7.5%. Despite the expected job losses many Forex traders expect the bad news to help the dollar. Forex traders expect the bad news will be an incentive for legislators to support the Obama administrations stimulus programs.

Waiting For Obama’s Stimulus Plan

It is hoped by many that Republicans, who voted against Obama’s stimulus plans, will put ideology aside and support most of the measures proposed by the new administration. Gregory Salvaggio of Tempus Consulting stated, “Looking beyond today’s terrible figures, everybody now expects the President’s rescue plan to pass and pass fast. That is helping lift stocks and is taking some risk off the table, which in turn leads the market to sell yen and buy back some dollars.”

Eyes On Washington

Right now Forex traders and investors are watching and hoping for the next stimulus proposals in Washington. Since the US has been the most proactive in addressing the financial crisis most Forex traders expect the US to be the first nation that will recover from the recession. Newly elected US president Obama said the entire stimulus package was needed to avoid a “catastrophe.”

Signs of Recovery

Last week the Bank of England cut rates to a historic low of 1%, the lowest in 300 years. The European Central Bank left their rates as they are, a move many economists disagree with. In the coming months Forex traders will be looking for the slightest signs of recovery.

World Economic Forum in Davos Switzerland

The annual World Economic Forum now taking place in Davos Switzerland has attracted the attention of Forex traders from around the globe. On their website the World Economic Forum states that their purpose is, “an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.”

Forum to Address Crisis

Because of the global financial crisis this year’

s meeting will be of particular interest to Forex traders and investors. Forex trading has been tumultuous during the crisis and Forex traders search through reams of data and statistics to glean useful information that will help them make successful trades.

Dollar’s Role as Reserve Currency Criticized

The US dollar continues to be the world’s reserve currency accounting for 63.9% of official foreign exchange reserves as opposed to 25.5% for the troubled Euro and 4.7% for the British Pound. This has raised the ire of Russia’

s Vladimir Putin who believes that it is dangerous for the world to excessively rely on the US dollar as the only reserve currency. In a statement which should have Forex traders taking notice Mr. Putin said, “Excessive dependence on what is essentially the only reserve currency is dangerous for the world economy, therefore it would be expedient to encourage an objective process for the emergence of several strong regional currencies in the future.”

Concerns About US Stimulus Program

At last year’s forum Bill Gates, Warren Buffett and George Soros predicted a collapse of the US dollar that did not materialize. At present the US dollar is being propped up by the perception that it is a safe haven currency. There was concern about the ‘buy American’ provisions in the Obama administration’

s multi billion dollar stimulus plan. Peter Allgeier, acting U.S. trade representative, assured forum attendees that the Obama administration understands concerns that the proposal could spark a trade war which would prolong the recession.

Gathering of Business Elite

Forex traders and investors will be watching the annual forum very closely. The annual forum draws a collection of the wealthiest business leaders and government officials from around the world. The discussions have profound effects on global markets and wise Forex traders will be paying close attention.

Dollar Rises Slightly

The US dollar rose slightly Thursday signaling a return of risk appetite for Forex traders and Investors. Another factor cited was the reluctance of the Federal Reserve to purchase long dated treasuries. The Fed also kept interest rates near zero and stated they were willing to purchase long term treasury debt is it would help to thaw credit markets.

Rise in Stocks Helps Dollar

Many Forex traders and investors fear an inflated Fed balance sheet which could cause the Fed to print more money to keep a dismal economy going. The decision of the Fed coupled with a rise in stocks and financial shares helped to bolster the dollar on forex trading markets. The perception that the new Obama administration was moving quickly to address toxic assets held by banks also helped the dollar.

Yen Edges Lower

The Yen edged lower on Forex trading markets as a slight return to risk appetite had Forex traders and investors seeking higher yielding currencies. The Japanese Yen has long been considered a safe haven currency for forex traders and investors and fluctuates because of Forex traders and investors tolerance for risk. The dollar rose 0.2 % to 90.52 Yen.

Markets Volatile

Forex markets have been doing a juggling act lately. Risk appetite and risk aversion are constantly shifting, often shifting daily. Forex trading under these conditions can be stressful for Forex traders. The global economic crisis has caused markets to perform in ways not seen before and each day brings new data that affects Forex and other financial markets. Forex traders have their work cut out for them this year!

Euro at One Week High

In what has to be an astounding piece of news for those who follow Forex trading, the Euro rose to a one week high against the US dollar and the Japanese Yen. Forex traders believe that the rise was caused by recent data by the German IFO economic research institute that showed that the business climate index exceeded expectations for December, the first improvement in eight months.

Rise Not Sustainable

The unexpected rise against the Yen was due to easing risk aversion. Many analysts and Forex traders credited the German government’

s stimulus plan for raising business confidence but at the same time warned against becoming too optimistic about the German economy. Audrey Childe-Freeman of Brown Brothers Harriman in London stated, “It’s a short-term relief to see that there hasn’t been a further deterioration from the December reading but whether it is sustainable is rather debatable. We can’t get carried away. The core data for Germany remains poor and the outlook for the German economy remains rather bleak.” She also stated that the rise was caused by a weak Euro and low oil prices.

Japanese Move Increases Risk Appetite

The Japanese government announced a plan to inject capital into struggling companies which caused some Forex traders and investors to engage in riskier trades which benefited the Euro and the struggling British Pound. There was some selling of the US dollar by Forex traders as they waited for the results of a two day meeting by the Federal Reserve which begins in Wednesday. Many Forex traders are waiting to see if the Fed will engage in more quantitative easing measures designed to help the overall economy.

Markets Still Volatile

In today’

s economy Forex trading requires nerves of steel. Markets are extremely volatile and the flight to risk aversion or risk appetite seems to change from day to day. Despite the global economy savvy Forex traders and investors are still able to turn a profit.

Policy and Personnel Changes

Forex traders and investors are sure to watch the actions of the new Obama administration and how markets respond. Obama has inherited the worst economy since the great depression. With a new administration come policy and personnel changes. Obama’s cabinet selections are now being confirmed by congress. Obama’

s pick for Treasury Secretary, Timothy Geithner, had a confirmation hearing Wednesday before the Senate Finance Committee.

More Funding Necessary

Former Federal Reserve chairman Paul Volcker, testifying in support of Geithner, stated that “several trillions of dollars will be necessary” from the Federal Reserve to revive the U.S. financial system. Volker also said, “Obviously, commitments made of that magnitude raise very large questions, there are also risks of undermining confidence in the dollar and raising the fears of future inflation.”

Chinese Largest US Debt Holders

As any Forex trader knows, if foreign investors were to quickly sell their large holdings of Treasury securities, it would wreak havoc with U.S. finances and drive down the value of the dollar. At the present time, Chinese investors are the largest overseas holders of U.S. Treasury bonds with $682 billion invested. Japanese investors own $577 billion dollars worth of Treasury Bonds.

Dependence On Foreign Investors Growing

Many economists and Forex traders fear that a massive selloff of Treasury Bonds by foreign investors could affect the value of the US dollar and further damage the US economy. With a stimulus program costing $800 billion dollars, costly wars in Afghanistan and Iraq, and future obligations of social security, the dependence on foreign investors is growing.

Baucus Slams ‘Mutual Addiction’

Finance Committee chairman Sen. Max Baucus, D-Montana, noted what he called “this mutual addiction”

between the United States and China. Simply put, Americans buy Chinese products and in return Chinese investors fund US spending by buying US backed securities.

Geithner’

s nomination will be voted on next week so it is too early to tell just what actions he and the new administration will take in addressing economic problems. At present, the US dollar is strong on international currency markets and Forex traders and investors will be watching the new Treasury Secretary closely.

Pound at Seven and a Half Year Low

On Wednesday the Pound dipped to a seven and a half year low against the Dollar and the Euro amid concerns over massive losses in the British banking industry and a deepening recession in the Euro Zone. The Japanese Yen held firm against other major currencies bolstered by safe haven buying and concerns by Forex traders and investors over the UK banking fiasco and a fall in US shares.

Bank of Scotland Posts Biggest Losses in British History

Wall Street greeted the Barack Obama presidency with a record Inauguration Day drop in shares amid new signs the global bank crisis was far from over. The Bank of Scotland posted the biggest bank losses in British history and is facing a government takeover. The prospect of credit downgrades of several Euro Zone countries has Forex traders watching markets closely. European Union predicted Monday that the 16-nation euro zone economy will shrink 1.9 percent in 2009.

Many EU Countries Facing Downgrades

Countries facing downgrades include Spain, Greece, Ireland, and Portugal. There are rumors that Britain is also headed for a downgrade. Credit ratings downgrades can make it more expensive for countries to borrow money and often dampen investors’ enthusiasm for the country. The European Commission said that the EU is facing a “deep and protracted recession.” The EC also forecast that the economy in the 16 nations that use the Euro will shrink by 1.9% in 2009, with the entire EU contracting 1.8%. The figures are a drastic cut from its earlier forecasts of 0.1% for the Euro Zone and 0.2% for the European Union.

EU in For Prolonged Recession

Forex traders and investors have been flooded with bad news from the Euro Zone and the UK. Most economists believe that the EU and the UK face a long and severe recession which is bound to affect Forex trading for a prolonged period. The EU is also predicting that 3.5 million jobs will be lost in 2009 with a resulting drop in consumer spending.

Dollar and Yen Safe Havens

At present it would appear that many Forex traders and investors are seeking the safe haven of the US dollar and the Japanese Yen. Many investors are hoping that the Obama administration can reverse the global recession but most predictions for 2009 are not positive. 2009 promises to be an exciting year for those engaged in Forex trading.

Yen Falls in Monday’s Trading

The Japanese Yen has fallen on early Monday trading because of the return of risk appetite in global markets. Forex traders report that a rally in share prices helped risk appetite return and boosted higher yielding currencies. US financial markets are closed for the Martin Luther King holiday and trade is expected to be light.

US Bailouts Calm Financial Sector

In the US, government aid to the financial sector calmed investors and lifted US shares signaling a return of risk appetite. Some Forex traders remained cautious about the sustainability of gains in share prices due to the ongoing global recession. Yousuke Hosokawa, senior manager at Chuo Mitsui Trust and Banking Co. said, “The currency market lacks direction and is moving within limited ranges. Gains in U.S. shares were within the range of rebounds and the U.S. financial sector still faces difficult times.”

Bank of America and CitiGroup Report Losses

Bank of America and Citigroup both reported multibillion dollar quarterly losses on Friday and Citigroup said it would split into two operating units adding to concerns about the US banking industry. Forex Traders were also keeping to the sidelines ahead of President-elect Barack Obama’s inauguration on Tuesday.

Dollar Climbs

The Dollar rose 0.4% from late New York trade on Friday to 91.03 Yen while the Euro climbed 0.7 percent to 121.50 yen. The Dollar Index, or DXY, which measures the value of the Dollar against several major currencies, was down 0.7 percent at 83.587.

Advances by higher-yielding currencies

Forex traders reported advances by higher-yielding currencies such as the Australian and New Zealand dollars which are seen as a measure of risk appetite. The Australian Dollar rose 0.8% to $0.6786 and against the Yen was up 0.4$ at 61.78 Yen. The New Zealand Dollar rose 0.6% to $0.5511 and 0.2% to 50.15 Yen.

New Administration, New Policies

For Forex traders and investors the last two weeks have been exciting with market changes almost daily. The incoming Obama administration in the US is sure to have Forex traders and investors keeping a close watch on markets and how they react to the new policies proposed by the new administration.

Greece’s Debt Rating Downgraded

Things just seem to be getting worse every day for the beleaguered Euro. Recent data from the Euro Zone has been dismal at best. In the latest round of bad news for the Euro Standard and Poor’s downgraded Greece’s sovereign debt rating putting even more pressure on the Euro.

ECB Cuts Rates

The long awaited rate cut by the European Central Bank was realized today (Jan. 15^th, 2009). The central bank cut rates by 50 bps to 2.0%. Many Forex traders expect the ECB to cut rates even further in the near future. In mid-morning trading in New York, the euro fell to a five-week low of $1.3048. News of a request by the Bank of America for more government aid added to concerns about mounting credit losses in the financial sector. This, in turn, depressed risk appetite sending forex traders and investors to the dollar seeking a safe haven.

ECB ‘Behind Curve’ Addressing Problems

Jessica Hoversen, a fixed income and currency analyst at MF Global Ltd. in Chicago stated, “As problems in the U.S. financial markets elevate we are seeing again risk aversion-mode in currency trading. And in that mode, the dollar benefits. On top of that, there’s no doubt the ECB is behind the curve, which does not help the euro.” During the global financial risk aversion has helped the US dollar to retain its strength.

ECB’s Rates Lowest Ever

The ECB, which has been seen by many Forex traders as slow to lower borrowing costs, reduced interest rates to 2.0 %from 2.5 %, its lowest rate ever. ECB president Jean-Claude Trichet has sent mixed signals about the timing of the next rate cut. Many Forex traders see Trichet’s talk of both inflation and growth risks and see concerns about inflation as misplaced. Economic data from the Euro Zone is deteriorating and many Euro Zone countries have seen their credit ratings cut or are at risk of future cuts.

Many Forex traders have seen the ECB’s stance as inflexible and consider the Euro Zone behind the curve in addressing economic problems. This week has been a wild ride for Forex traders and investors.

Job Losses Not as Bad as Projected

The Dollar rose Friday as data released by the US showed that job losses were not as bad as had been projected. Forex traders had positioned themselves for a dismal non-farm payroll report. A report released earlier in the week had stated that job losses had reached 693,000. Many of those short trades were squeezed when the government reported a figure of 524,000, slightly better than the market’s revised 550,000 forecast.

Dollar ‘Dodges Bullet’

Nick Bennenbroek, head of currency strategy, at Wells Fargo in New York said, “The dollar has dodged an economic bullet. Even though the report was generally discouraging, the headline payrolls decline was broadly as forecast. And perhaps most significantly for the dollar, we don’t think today’s report will accelerate further monetary easing from the Federal Reserve.”

US loses 1.9 Million Jobs

Although the figures in the job report were not as bad as predicted many analysts and Forex traders believe that there is plenty of bad news for the US and its currency. The 7.2 percent unemployment rate was the highest in 16 years and the US has lost 1.9 million in the last four months. Total job losses for 2008 were 2.6 million, the largest decline in 63 years. Kathy Lien, currency researcher at GFT Forex, stated, “There was nothing good in the report, The U.S. is in recession and in previous recessions, job cuts have lasted for at least 15 months.”

Many Forex traders have observed that the US has suffered 12 straight months of job losses. Despite the figures the dollar is still holding its own on currency markets and Forex traders expect this to continue in the immediate future.