Fundamental factors which bias the direction of the EURUSD

[dtrend]

Hi,

 

I'd like to kick off a discussion of the fundamental factors which govern the longer term trend of a major currency pair.

Note: I arbitrarily chose EURUSD as a starting point (I could easily have chosen USDJPY, USDCHF, GBPUSD).

 

I note that there might be a similar thread already started, but it appears to be in Indonesian, which I cannot read, so this doew

not seem redundant.

 

I believe that this understanding could be useful in gaining an edge in understanding the longer term trend of say the EURUSD.

 

First, what factors do you believe are important to consider?

 

I'll try to kick it off:

a. interest rate differential between the European Bank(ECB) and the Federal Reserve(FED)

b. Dollar strength drives EUR/USD lower

c. FED intervention to weaken the dollar the sends EUR/USD higher

 

Can anyone add to this list? Maybe we can distill it to a top 10 or top 5.

 

Where do YOU see the EURUSD headed in the next few weeks/months/year? Why?

 

As I side topic: What is the best time to trade the EURUSD?

 

I don't fully understand or even pretend to understand the fundamental reasons. But I hope this opens it up to discussion and

maybe we can all learn something?

 

Sincerely,

-dtrend

[soundfx]

Re: Fundamental factors which bias the direction of the EURUSD

 

Hi dtrend,

 

I think we need to add "Risk appetite" and "Risk aversion" to the list.

 

These are phrases which are often used to describe FX movements since the global economic collapse.

 

Risk Appetite - Connected to greed and and a positive global economy. It means that the big guns are investing in stocks, commodities and high yield currencies.

 

Risk Aversion - Connected to fear and global economic uncertainty. Low risk assets are favoured such as bonds and traditional safe currencies (e.g. USD).

 

These factors in the current climate can override standard fundamental expectations, e.g. favourable job stats. come out for the US (which would normally make USD stronger) and EUR/USD still goes up (because the perception is that the global economy is improving so more risk can be taken) and everyone is left scratching their heads lol.

 

As far as EUR/USD goes, if you think that the global economy is going to gradually improve then longer term go Long or if you think that there's more economic disaster to come around the corner then go Short.

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

Excellent suggestion soundfx.

 

Running list:

a. interest rate differential between the European Bank(ECB) and the Federal Reserve(FED)

b. Dollar strength drives EUR/USD lower

c. FED intervention to weaken the dollar the sends EUR/USD higher

d. risk appetite

e. risk aversion

 

I think it would have been a brave/foolish/wise soul to trade up against the FOMC decision today.

Perhaps brave if you knew the timing of the announcement and traded the volatility, foolish if you were unaware of the fundamental impact, wise if you avoided it?

 

Anyone willing to share their actual experience today?

 

-dtrend

[darksorrow]

Re: Fundamental factors which bias the direction of the EURUSD

 

There are 5 things which derive a countries currency strength:

 

> Interest rates

> Inflation

> Unemployment

> Govt. Intervention

> I forgot another :">

 

I found them when i was doing my internation finance course. :D

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

Recent price action over last couple weeks on the EURUSD affected by PIGS?

 

"They are called the PIGS -- Portugal, Ireland, Greece, Spain. What they have in common is that all are facing deficits and debts that could bring on national defaults and break up the European Union.

 

What brought the PIGS to the edge of the abyss?

 

All are neo-socialist states that provide welfare for poor people, generous unemployment, universal health care, early retirement and comfortable pensions. Most consume 40 percent to 50 percent of their gross domestic product annually, a crushing burden on the private sector. "

 

"That’s the unflattering acronym coined in recent weeks for four heavily indebted European economies — Portugal, Ireland, Greece and Spain — which have seen their bonds trashed as investors have become increasingly concerned about their ability to get themselves out of fiscal trouble. It was Greece that started it, with its budget deficit of nearly 13% prompting concerns that it would default on its debts. But the contagion has spread to the other three “weak link” economies, causing tumult in global markets and raising questions about the euro zone itself."

 

"What’s causing today’s move?

 

Take your pick; rumored reports of a bailout for Greece (which were later denied by German officials), great earnings numbers from Coca Cola, or upgrades of notable stocks like Caterpillar.

 

Most traders are pointing to the optimism in Greece, which has led to a drop in the dollar. The dollar’s weakness then triggered a bid in riskier securities like the Euro, Pound, equities, gold, and oil. As such, today’s early moves have sparked a greater rally as traders who were on the sidelines following last week’s move have reentered the market. Also, short covering is another possible reason why the EURUSD was able to trade briefly back above 1.3800.

 

Nonetheless, the question to be asking is whether this move has legs to continue. The biggest reason to be pessimistic is today’s news is similar to last Wednesday’s comments that the ECB would work to help stabilize Greece. We all know that last week’s brief move higher in the Euro ended with the complete meltdown of the Euro. Also, Greece only makes up one part of the PIGS, so by tomorrow, flaky traders may have already forgotten about Greece and turn their attention to Portugal and Spain."

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

Does anyone have any thoughts on global capital flows?

 

Are there key inter-market relationships that anyone has considered? For example.

 

US dollar vs equities (s/p, nikkei)

 

US dollar vs bonds (10yr note, German Bunds)

 

US Dollar vs commodities (gold, oil, grains) --- where are the capital gain opportunities? Are they offshore (the USA)?

 

US Dollar vs VIX --- higher risk implies flight to the dollar and the yen?

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

Germany is preparing to drop its vehement opposition to a rescue package for Greece, fearing that a rapid escalation of the debt crisis in Southern Europe could endanger German banks and damage the euro.

 

Wolfgang Schäuble, Germany's finance minister, has asked officials to prepare a plan in time for a summit of EU leaders on Thursday, according to reports in the German media. The options include either a loan from EU states or some sort of institutional EU response.

 

The news pushed the euro to $1.38 against the dollar, the strongest one-day rally since the single currency began its nose-dive late last year. Yields on Greek 10-year bonds plummeted 36 basis points to 6.39pc in a matter of hours as speculators scrambled to exit overstretched positions, with synchronised moves for Portuguese, Spanish, and Italian bonds.

[forex4love]

Re: Fundamental factors which bias the direction of the EURUSD

 

Fundamental analysis is all about the supply and demand of a particular currency and the health of the economy the country in question.

 

Fundamental analysis is used to analyze the valuation of currencies by monitoring various economical, social, political and environmental factors. There are a number of economic indicators, such as interest rates, unemployment rates, gross domestic product (GDP) and many other which need to be monitored. We need to track various economic releases from various countries/economies which come out periodically..

 

 

More details, please download this file:

hxxp://www.4shared.com/file/220185612/875ccb62/Fundamental_analysis_is_all_ab.html

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

That's a great post forex4love. It would be interesting to fill out the fields for the majors and compare them.

 

In the next few posts I'll post excerpts from an article on the US Dollar I've been reading from a magazine I received in the mail. I think that people are interested in reading this thread (judging from the hits). If you think I should keep posting, then please hit me with a kudo. If you think it's a waste of time, either post it or hit me with a pm telling me it's a waste.

 

"Is the Dollar Doomed or Destined?" By Charmaine Buskas.

(stuff deleted)

The U.S. dollar has increasingly become a problem for a number of global market participants. Its cyclical adjustment has underpinned significant appreciation in several currencies, and the structural hurdles developed through the recent financial market crisis raise the concern that the greenback may not be the champion currency it once was.

(stuff deleted)

Notwithstanding this unpleasant surprise from Dubai, with the U.S. and global economies on the road to recovery, HOW WILL THE DOLLAR PERFORM? Will it still hold its position as reserve currency of the world, even with the enormous deficits racked up by the massive bailout packages from the U.S. government?

 

There have been recent rumblings among some heavy global hitters that they are increasingly either diversifying or considering diversifying away from the U.S. dollar. If the dollar is truly at a structural turning point, there is no better time than the present to delve into the many issues surrounding its long-term fate.

 

(to be continued)

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

One of the issues that for some time has been discussed as a key for the long-term trend for the U.S. dollar is the composition of global central bank reserves. According to the article, in 2000, 71 percent of total allocated reserves were in U.S. dollars. In the second quarter of 2009, U.S. dollars only comprised 62 percent of all the allocated FX reserves globally. The major beneficiary of the shift by the global central banks was the Euro. In 2000 the Euro accounted for 17% of the allocated reserves. In the second quarter of 2009 it accounted for 27%.

 

But, the percentages quoted are derived from International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) data which captures at best about 70% of the world's reserves. Thought to be missing is data for China and Persian Gulf countries.

 

While diversification into Euros is a clear trend. diversification by BRIC countries (and their currencies) and how it affects the dollar is not so clear. The Reserve Bank of India has been acquiring massive amounts of gold and China has announced a multi-year strategy of gold acquisition, which could be seen as further evidence of diversification away from the greenback.

 

(to be continued)

 

If you enjoyed this post, then please hit me with a kudo if you haven't done so before. If you think it's a waste of time, either post it or hit me with a pm telling me it's a waste.

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

news interrupt:

" BRUSSELS, Feb 15 (Reuters) - Greece faced down pressure for deeper budget cuts at euro zone talks on Monday and warned that last week's support pledge by European leaders may not suffice to stop the debt market squeeze on governments in the region.

 

Greece last Thursday became the first country in 11 years of European monetary union to require such a pledge after mounting concern about its ability to service a bloated debt sparked a market frenzy that drove bond yields up and the euro down.

 

Greek Finance Minister George Papaconstantinou defended his government's plans to slash the public deficit from 12.7 percent of gross domestic product to less than three percent by 2012, starting with a four-point cut in 2010.

 

"We're trying to change the course of the Titanic, it cannot be done in a day," Papaconstantinou told reporters as he headed into talks with other euro zone finance ministers in Brussels.

 

"If additional fiscal measures are needed, we will take them. Today it is Greece, tomorrow it can be another country. Any European country can be prey to speculative forces."

[forex4love]

Re: Fundamental factors which bias the direction of the EURUSD

 

Commodities Trade Narrowly as Investors Await More Details from EU

 

Commodities trade narrowly in Asian session Monday as investors are digesting the impact of policy changes last week. Moreover, the market is relatively quieter as China, Hong Kong, Taiwan, Singapore and Malaysia are closed for the Lunar New Year holiday while US is closed for President's Day.

 

WTI crude oil continues hovering at 74 after closing at 74.13 last Friday. Unexpected increase in required reserve ratios in Chinese banks weighed on prices while higher-than-expected crude and gasoline inventory revealed sluggishness in the energy market. However, upgrades in global oil demand outlook by EIA and OPEC provided support to prices.

 

EU leaders are meeting in Brussels today and are expected to discuss about assistance to Greece in greater details. The union met last week and released a statement pledging to help Greece in overcoming its financial deficit issues. Yet, there're no detailed plans on how to solve the problem.

 

The euro remains weak against the dollar amid concerns about sovereign crisis in peripheral European countries. Currently trading at 1.362, EURUSD stays at 9-month lows. Although the currency pair may stage rebound as it is now in oversold territory, outlook remains weak and is prone to decline further.

 

Gold trades sideways below 1100 on USD's strength. Others in the precious metal complex are also range-bounded. Silver is trading at 15.5 after closing at 15.45 last Friday. For PGMs, platinum is trading at 1515, compared with Friday's close at 1519, while palladium is trading at 418, flat as Friday's close.

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

News interrupt (continued): ---- to underscore forex4love's feedback.

 

"Limited spillover to the US. The European sovereign debt crisis may net to slower European growth from an already-tepid starting point. Although the European Council of government leaders has pledged "to take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole", that backstop is unlikely to immunize the euro-zone economies completely. The crisis likely will tighten financial conditions and promote fiscal austerity, consisting of increased taxes and lower public sector demand. And the crisis hits a still-tender euro area economy, which we have expected to advance just 1.2% in 2010. Incoming data showing that growth rose just 0.1% in 4Q09 and a poor start to 1Q10 underscore the downside risks

 

Indeed, from a short-to-medium-term cyclical perspective, the crisis seems likely to slow European growth through three channels: 1) rising risk premiums on the region's sovereign debt will tighten financial conditions; 2) higher funding costs and constraints on market access will limit the supply of bank credit; and 3) fiscal tightening - both spending cuts and tax increases - will weigh on growth in peripheral economies. In turn, the willingness of core EU countries to backstop the periphery, perhaps with an emergency lending facility sponsored by Germany, seems likely to cause the contagion to spread to the core. As a result, we now expect 10-year Bund yields, which have begun to rise despite soft incoming European data, to rise to 4.5% this year. A weaker euro will be a partial offset by helping boost the region's export competitiveness; we expect the euro to decline to 1.24 EUR/USD. <<<<< note!

 

Contagion tail risk. Our base case is that peripheral Europe will muddle through with assistance from the core. Yet the crisis will surely slow European growth somewhat. Contagion spreading from the European banking system is the biggest tail risk. If the crisis spills over into broader risk-aversion, a drying up of liquidity, and deleveraging - the functional equivalent of the US subprime crisis - the consequences could be more dire. That scenario is far from investors' minds, and we think it is highly unlikely, given that EU officials have made it clear that conditional assistance for Greece is coming. But that's what makes it important to think about." - Richard Berner (Morgan Stanley)

 

Ticking time bombs: "Feb. 17 (Bloomberg) -- Italy, saddled with the euro region’s second-largest debt, is the “biggest threat” to the economy of the 16-member bloc, according to Nobel Prize-winning economist Robert Mundell. " (Mundell was the original theoretical architect of the Euro).

 

Germany has signaled that they aren't jumping onto the "let's backstop Greece debt", so the question is: Can Greece institute real reform?

 

Mr. EuroBear, will you get shaken out by a bounce? Will you hold on?

[dtrend]

Re: Fundamental factors which bias the direction of the EURUSD

 

Hot off the wire: "Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’ "

 

Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

 

The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.

 

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

 

The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.

 

That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.

 

------ All the current tizzy equates to a rising potential of the breakup of the euro as a currency. While that probability is still very low, but it seems to overwhelm any technical analysis considerations.