OVERIVIEW

The Yen has risen sharply during Thursday trading session after release of worse than forecasted manufacturing data from China. It forced investors to sell stocks of Japanese companies and to buy Yen instead. In accordance with Thursday data manufacturing activity in China constricted in May for the first time during last 7 months. It has exacerbated concerns about slowing down of growth of the second economy of the world. Such weak data pushed the Japanese index Nikkei to fall by 7.3%, which was the biggest intraday decline in 2 years. In order to compensate losses incurred against the background of Japanese shares’ downgrade, investors began profit taking on their positions in USDJPY pair, that grew by almost 30% since the middle of October. Profit taking caused the Dollar to depreciate against the Euro, Australian Dollar and other main currencies.  A lot of investors have been purchasing Dollar in recent 2 or 3 weeks, and that’s why market has started profit taking. Dollar’s weakening was unusual, because the Dollar and the Yen are considered to be a sort of “asylum” currencies. They are normally strengthening during market instability.  The Dollar recently has stopped being perceived as s safe harbor. This month the Dollar appreciated by 3%. This growth was triggered not by concerns regarding growth of the US economy, but anticipations of US economy strengthening able to force the FRS to start closing its program of bonds’ purchasing. It would lead to Dollar’s appreciation.  Thursday US data turned out to be better than forecasted, suggesting further US economy recovery. The number of Initial Jobless claims last week dropped more than anticipated. New Home Sales in April grew by 2.3% in the US reaching the highest level since July 2008. On Wednesday the Dollar abruptly appreciated after the head of the FRS Ben Bernanke assumed that the CB could start closing its program of assets’ purchasing quite soon if economy continues to improve.

TECHNICAL ANALYSIS

EURUSD

The Euro is in downtrend from 1.3242.  Key resistance is at 1.2998. The break above it will be a signal of the end of downtrend. If that’s the case, then 1.3500 will be a target on the upside. The Euro is back above 1.2900 after bouncing from the low of 1.2810. Now it can remain ranged between 1.2800 and 1.3000.

USDJPY

The pair moved up as a result of Yen weakening because of Nikkei fall. The pair is expected to remain ranged between 101.00 and 103.00. After consolidation further descent is the most likely scenario. The target on the downside is 100.00.

GBPUSD

The Pound remains in downtrend form 1.5605. The target on the downside in case of bearish trend continuation is 1.4900 area. The Pound has fallen below 1.5100. It can dip further down and approach 1.5000.  A significant trend reversal may occur, if the Pound closes above 1.5120.

Inconvertible Currency

A situation where one currency cannot be exchanged for another currency because of foreign exchange regulations or physical barriers. Inconvertible currencies may be restricted from trade due to extremely high volatility or political sanctions.

Investopedia explains ‘Inconvertible Currency’

Labeling a currency as inconvertible allows regulators to protect investors from storing funds in an unsafe investment. For example, if a nation were to begin experiencing hyperinflation, where the value of a unit of currency rapidly depreciates, its currency could be deemed inconvertible. This would prevent investors from converting funds into the unstable currency.

What is Market Sentiment

How’s Mr. Market Feeling?

Every trader will always have an opinion about the market.

“It’s a bear market, everything is going to hell!”

“Things are looking bright. I’m pretty bullish on the markets right now.”

Each and every trader will have their own personal explanation as to why the market is moving a certain way.

When trading, traders express this view in whatever trade he takes. But sometimes, no matter how convinced a trader is that the markets will move in a particular direction, and no matter how pretty all the trend lines line up, the trader may still end up losing.

A trader must realize that the overall market is a combination of all the views, ideas and opinions of all the participants in the market. That’s right… EVERYONE.

This combined feeling that market participants have is what we call market sentiment.

It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market.

How to Develop a Sentiment-Based Approach

As a trader, it is your job to gauge what the market is feeling. Are the indicators pointing towards bullish conditions? Are traders bearish on the economy? We can’t tell the market what we think it should do. But what we can do is react in response to what is happening in the markets.

Note that using the market sentiment approach doesn’t give a precise entry and exit for each trade. But don’t despair! Having a sentiment-based approach can help you decide whether you should go with the flow or not. Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas.

In stocks and options, traders can look at volume traded as an indicator of sentiment. If a stock price has been rising, but volume is declining, it may signal that the market is overbought. Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish.

Unfortunately, since the foreign exchange market is traded over-the-counter, it doesn’t have a centralized market. This means that the volume of each currency traded cannot be easily measured.

JPY

‘The level of benchmark yields is still in a low range historically, however, the pace of the rise in yields is too rapid’ – Soichi Okuda, chief economist at Sumitomo Shoji Research Institute

The world’s third largest economy is picking up as the demand in the neighbouring countries improves, but still remains weak within the country, the Bank of Japan said during its monthly policy meeting. The BoJ has not introduced any shifts to its monetary policy, meeting analysts’ expectations. Japan’s gross domestic product expanded 3.5% last quarter, however improvement in increasing exports and boosting corporate investment and wages has lagged. The sharp drop in the Yen helped stabilize exports, which surged 3.8% in April from a year earlier, but it is also accentuating increasing import costs. Haruhiko Kuroda has made a recovery of the nation’s export industries a priority of his administration and there are already signs of improvement, however longer-term structural reforms are needed to boost Japan’s international competitiveness. The fact the yields on Japanese 10-year bonds touched 1% for the first time in a year is posing certain risks to the recovery.

‘The level of benchmark yields is still in a low range historically, however, the pace of the rise in yields is too rapid,’ said Soichi Okuda, chief economist at Sumitomo Shoji Research Institute in Tokyo. ‘Given the recent gains in bond yields, market participants are interpreting that the BOJ is accepting a rise in bond yields to some extent.’

EUR

‘We see the euro zone being out of recession in the third quarter’ -Christian Schulz, senior European economist at Berenberg Bank

The downturn across the 17-nation economy eased slightly this month, however a dearth of new orders is raising concerns that the economy is likely to contract again. According to London-based Markit Economics, a composite index in both industries jumped to 47.7 from 46.9 in the previous month, exceeding analysts’ expectations of a 47.2 reading. At the same time a gauge of manufacturing activity rose to a three-month high of 47.8 in May, while a gauge of activity at service sector improved to 47.5 up from 47.0. The report also showed that the new orders services index slipped to 45.3 from 46.2, meaning a big upturn in the next month’s reading looks unlikely.

‘We see the euro zone being out of recession in the third quarter,’ said Christian Schulz, senior European economist at Berenberg Bank in London. ‘We’ve seen improving confidence since the ECB provided a safety net, and the risk of countries having to leave the euro has decreased. Also austerity is fading.’

‘The ECB’s quarter-point cut in interest rates seems to have done little to inspire confidence that the economy will start to pick up again,’ he said.