Thursday, November 20, 2014

Forex volatility on market session openings | Iron Ore falls further, and takes the Aussie with it

The question of market timing is an important one, as we pointed out recently. Yesterday was a case in point, at least with regard to those currency pairs that involve the US dollar and the Euro.

While there were a number of economic announcements, none of them would be regarded as major market movers in the normal scheme of things. At 9:00 AM GMT we had the Eurozone Purchasing Managers Index (PMI), which was disappointing but not dramatically so. It was preceded by a price range in EURUSD and other pairs in the previous hour that gave added meaning to the idea that one should stay out of the market until such time as the big players start activities in London. They seem to get going in earnest at 9:00AM.

The next report was retail sales in the UK, a very good figure, which gave Sterling a boost and lifted the Euro in sympathy. Then there was inflation data from the US, which was unchanged from the previous outcome. The most important report was that giving initial jobless claims. The fact that this came at sub 300k for the third month in a row added to the allure of the US dollar. It started to move the EURUSD pair in the downward direction at the start of business in New York. It was not, however, until Chicago came on line an hour later that this move got legs.

The activities of futures dealers in the Windy City can have a profound effect on exchange rate movement at the start of their morning, and on many occasions the resulting move is totally in the opposite direction to what it had been up to that point in the day. One needs to be aware of these matters when trading Forex.

Iron Ore falls further, and takes the Aussie with it

Iron Ore took another deep knock yesterday, falling over 3% on the day to $70.00 per tonne. This is just about half of where it was this time last year, and considerably lower than it was before that.

The really fast fall in recent times has come about because the biggest miners in Australia, BHP Billiton and Rio Tinto, decided some time ago to modernise and expand their production facilities in order to cut production costs. It is a common risk where new capacity can only be implemented in large increments, which takes time, that demand might have diminished when the work is complete. That is what has happened here. Chinese demand in particular has tapered off. Rio and BHP, however, are not about to mothball their mines. They have decided to make use of the situation to pump even more product into the market. They can afford to do this even as the price plummets and will thereby “increase market share”, which in reality means sending smaller producers out of the business. Ironically, many of these are in China. A recent survey by the Chinese National Bureau of Statistics indicates that as many as 20% of indigenous Chinese Iron Ore miners are losing money at the current price.

And yes, the Aussie dollar is also suffering from the Iron Ore price collapse. The commodity is still important to the Australian economy. The Australian dollar is now flirting with lows against the US dollar that have not been seen for four years. That this situation is in accord with the wishes of the Aussie authorities means that the fall could continue.

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