So you want to get into foreign exchange
(“forex”) trading? This is understandable since forex is the biggest action on
earth, bar none. In mid-2006, International Financial Services, London (IFSL)
estimated that daily turnover in just the major trading centers – London, New
York, Tokyo and Singapore – averaged some U.S.$2.9 trillion. By comparison,
turnover in stock markets around the globe amount to less than a tenth. And the
62 casinos in Las Vegas and Macau combined had a gross take of less than $14
billion in 2006. Here is how you can get in on the action.
Where do you go to participate? Well,
first of all, there is no bricks-and-mortar central exchange like the London
Stock Exchange, the New York Stock Exchange or the Chicago Board of Trade (for
commodities). The forex market is widely dispersed through thousands of
storefront money changers (the “over-the-counter” or OTC market) and banks
trading with each other.
Most of the world’s leading currencies
are valued relative to each other, to the U.S. dollar, to be more specific. It
is no wonder then that exchange rates and where they are headed attract so much
attention from heads of governments, central banks, importers and exporters.
Every newspaper business page contains a forex bulletin each weekday and entire
TV broadcasts are devoted to the standing of major currencies.
The investment and speculative
opportunities for buying one currency or selling another occur because
virtually every currency follows a “floating rate”, not fixed, regimen. That
is, on any given day, hour or minute, exchange rates are determined by supply
and demand. Market psychology, economic factors and political developments
influence exchange rates one way or the other.
So
where does one go to participate in the forex market? At the simplest level,
one can “buy” a favored currency from a money changer or bank, take “physical
delivery”, store it in a strongbox at home or in a foreign currency deposit
account, then sit back and wait for it to rise in value
versus another currency over a period of weeks or months.
One could leave management of a more
varied currency basket, to trade reactively or speculatively to the traditional
channels: investment and commercial banks, money portfolio managers, and money
brokers. Then your account will have to compete with those of corporations and
wealthy individuals for proper attention.
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If one had known in the third quarter of
2006, for example, that the Philippine government would announce highly
positive economic fundamentals and a record-setting invisibles inflow by
Christmas, going short on the U.S. dollar-Phil peso rate would have ridden a
full 10% appreciation by New Year’s Day 2007. And if one had speculated that
mixed news on the economic front would hurt the U.S. dollar, buying $1 million
worth of euros on April 3, 2007 would have earned a profit of close to $30,000
by month’s end or an annualized return of about 25%.
Holding on to a favored mix of
currencies over a period of time takes steel nerves, however, because numerous
market sentiment, political and economic factors introduce great volatility in
forex rates. In the interbank market, traders “take positions on” (buy and
sell) a given currency pair like the dollar and the euro dozens, even hundreds
of times a day.
For now, you have learned that the forex
market represents awesome trading potential. Like the stock market, currency
markets let you profit on both good and bad news. Fortunately, there are
various institutions that can help you open and manage an account.
Summary:
The international foreign exchange
market is, in point of daily volume, the biggest action arena of them all. How
does it work and what do you do to get in on the action? This article starts
you on the road to more informed investment decisions.
Title:
Forex
Trading for the Sophisticated Investor
Sooner or later, every high-asset
investor participates in the equities, bonds and commodities markets or at
least seriously considered these choices. Currency trading seems more arcane
but bears adding to the portfolio.
Money is fascinating in and of itself.
In addition, however, foreign exchange trading catapults the savvy investor to the
realm of international import-export transactions and investment flows. Hence
the volumes are huge, reliably estimated as close to $3 trillion every single
trading day. Hence, the opportunity for profits is immense. But so is the
downside, if ill-considered placements are made.
Setting aside market sentiment, one
makes better-informed decisions based on the political developments and
economic indicators that are reported for each country in a currency pair.
Herewith a syllabus of sorts for Political Economy 101.
If you want to take a position on the
dollar vis-à-vis the renminbi, for instance, you must pay attention to the
growth of gross domestic product (GDP) in both China and the United
States. GDP is a quick read on how well the economy of any nation is growing.
Usually reported as a quarterly or annual growth rate, GDP is the sum total of
wealth-producing activities in agriculture, industry and services.
The
more consistently an economy expands and, within limits, the faster it does,
the stronger will consumer confidence be and the firmer the belief of
fund managers in one or both of the currencies in the forex pair. As well,
economic growth implies capital inflows by investors interested in capitalizing
on growth opportunities, thereby firming up that country’s capital account and
foreign reserves. Among other things, the foreign reserve of trading partner
currencies is a bulwark against speculation designed mainly to put the dollar
or renminbi in play.
In turn, accelerated investment
boosts employment and increases demand for raw materials and services, a cycle
that strengthens the prospects for continued growth down the road.
On
the demand side, GDP reportage might reveal the status of personal consumption
expenditures. Together with government outlays and total investment activity, consumer
spending is the engine that drives economic activity. The well-informed
forex investor may hear or read bits and pieces of the consumer spending panorama: housing
starts, car sales, sales ex-manufacturer and in-store, purchases of luxury
goods. What matters is putting all these together into a coherent reading of
consistent growth in consumer spending.
In medium-size or developing economies,
consumer spending has the additional value of giving the investor a solid clue
whether domestic demand is growing fast enough to offset over-dependence on
exports.
Interest rates
comprise a fifth indicator. When the Fed (or other central monetary authority)
decides to raise bank reserve requirements, money supply shrinks and interest
rates rise. Or interest rates might be used to hold inflation in check. So a
Tokyo fund manager dissatisfied with the 1% interest on his yen deposits might
decide to park his funds in U.S. 2-year bonds which bear a coupon rate of 4.5%
and on which the yield has risen lately. All other things equal, such thinking
would strengthen the dollar and weaken the yen.
On another level, dissatisfaction with
interest rates may spotlight the gains to be had in forex trading. Correctly
guessing that mixed news on the economic front would hurt the U.S. dollar,
buying $1 million worth of euros on April 3, 2007 would have earned a profit of
close to $30,000 by month’s end or an annualized return of about 25%.
At the end of the day, one can expect
capital gains in forex trading by attending to political economy factors such
as GDP, interest rates, consumer confidence and spending.
Summary:
This article explains why certain
political economy fundamentals are vital to understanding the state of a
country and its currency relative to another. Learn what are the essential
developments that strengthen or weaken a currency and invest more rationally.
Title:
Why
the Euro Gained Primacy
Since
its launch in 1999 as accounting currency and distribution as physical coins
and banknotes just five years ago, the Euro has appreciated against the U.S.
dollar, become the currency of choice for international financing instruments,
and grew to be the second most actively-traded currency, after the U.S. dollar,
in forex markets. It is not enough for detractors to claim that sheer force of
habit by a continent-wide mass of people has kept the Euro prominent. The
vitality of the Euro zone economies, development of more sophisticated
financial intermediaries and greater liquidity are equally important.
The tremendous size, diversity,
dynamism and openness of the Common Market economies invite equally brisk trade
and significant capital inflows. Given a population that is at least 50% bigger
than that of the U.S.A., gross domestic product at least as large and managed
in open, democratic fashion, the EU can obviously wield great economic
influence on a global scale.
True, recent economic growth has been
diluted somewhat by counting the accession nations and others waiting in the
wings. Compared to economic growth that averaged 5.7% in the
rest of the world, the Euro zone was positively sluggish in typically expanding
at just over 1% over 2003 to 2005.
The influence of the Euro can only
continue to grow, however, as the EC countries individually and collectively
strive for structural reforms, reduce or take down subsidies, otherwise improve
productivity, and rein in fiscal deficits.
Secondly, more predictable price levels
in the EU countries and a fairly steady exchange rate reduces
intermediation costs and risk. Financial markets can accept euro-denominated
debt instruments with greater confidence on what the conversion and payoff
outcomes will be months or years down the road. Political will exercised by the
member-countries aside, the terms of the Maastricht Treaty did empower the
European Central Bank (ECB) with the autonomy and authority to keep inflation
in check. The record of the ECB in this respect has been enviable. Inflation
has been manageably low and the exchange rate of the Euro has, except in recent
weeks when appreciation was the norm, stayed within very narrow bands. Yet a third factor that explains the
current preeminence of the Euro is the diversification and integration of financial
markets on the continent.
Long-running
enmities die hard. Compared to the U.S. experience, banks historically
monopolized financial markets in the Euro zone. And before the Common Market
and currency integration came into being, the financial sector in each country
was more prone to compete, rather than cooperate, with cross-border rivals.
Since the mid-1980s, however, financial
systems have evolved and become more sophisticated. The adoption of the Euro
and, in 2000, the Financial Services Action Plan (FSAP) were important
milestones. Specifically, the FSAP bound the member-countries to eliminate
regulatory and market barriers. Providing and accessing financial services
regardless of national borders induced the free flow of capital and, by
racheting up competition, introduced more efficient financial markets.
Concretely, the favorable developments
have included more liquid bond markets, a narrower range of sovereign interest
rates, and financial instruments that became more creative but also more
complex. The stock markets have also benefited.
Investors
seem better-prepared to focus on company and industry news rather than on how
market sentiment or political economy differ country by country. There is
greater consistency in stock prices across the major bourses and EC-wide funds
have gained a better equity markets.
All in all, the current strength of the
Euro can be attributed to the great size, industrialization and openness of the
Common Market itself, as well as stable prices, intermediation costs and
exchange rates.
Summary:
The Euro has been catapulted to center
stage on global forex markets. For one, it is now the leading currency in which
international bonds are denominated. This article spotlights the fundamental
reasons why.
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