forex exchange

Hedge funds as speculators

2009-11-03T07:44:00.001-08:00

About 70% to 90%[citation needed] of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Central banks

2009-11-03T07:43:00.002-08:00

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[7] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Commercial companies

2009-11-03T07:43:00.001-08:00

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Banks

2009-11-03T07:42:00.000-08:00

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Market participants

2009-11-03T06:19:00.002-08:00

Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.

Foreign exchange trading increased

2009-11-03T06:19:00.001-08:00

Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues have made it easier for retail traders to trade in the foreign exchange market. In 2006, retail traders constituted over 2% of the whole FX market volumes with an average daily trade volume of over US$50-60 billion (see retail trading platforms).[6] Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. The ten most active traders account for almost 80% of trading volume, according to the 2008 Euromoney FX survey.[3] These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market taker will buy ("bid") from a wholesale or retail customer. The customer will buy from the market-maker at the higher "ask" price, and will sell at the lower "bid" price, thus giving up the "spread" as the cost of completing the trade. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of base currency, which is a standard "lot".

top 10

2009-11-03T06:18:00.001-08:00

Rank
Name
Market Share
1
Deutsche Bank
20.96%
2
UBS AG
14.58%
3
Barclays Capital
10.45%
4
Royal Bank of Scotland
8.19%
5
Citi
7.32%
6
JPMorgan
5.43%
7
HSBC
4.09%
8
Goldman Sachs
3.35%
9
Credit Suisse
3.05%
10
BNP Paribas
2.26%

Market size and liquidity

2009-11-03T06:17:00.001-08:00

The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. [2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.[4] In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—[1]; [2]) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.

The foreign exchange market

2009-11-03T06:16:00.000-08:00

The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars.
In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

pak forex broker

2009-11-03T06:14:00.000-08:00

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Norway’s Central Bank Raises Rates to 1.5 Percent

2009-11-03T06:13:00.001-08:00

Norway is the first European nation to raise rates, and the third worldwide. The 25 basis points increase raised the rate to 1.50% and out of the record lowest interest rate. Economic fundamentals have been strong in Norway, and made the decision much easier for the Norges Bank. Exporters will be hit by the appreaciation of the local currency as its rate differential begins to look attractive for investment. Scandinavia’s only non-European Union member came out of recession in the

Brazil Taxes Inbound Speculative Funds

2009-11-03T06:12:00.002-08:00

in an unprecedented move for the South American country, Brazil is planning to impose a tax to inbound investment to slow down the climb of the real. It is going to be interesting to see if this move is a wise choice by Brazilian authorities and if it can reduce speculation without damaging Foreign Direct Investment. The tax on capital inflows, which takes effect today, will take the form of a 2 per cent levy on foreign investment in the stock

Roubini Says Beware the Carry Trade Asset Bubble

2009-11-03T06:12:00.001-08:00

Dr. Doom – AKA New York University Professor Nouriel Roubini – is at it again. The man who is credited with being the first to point to the questionable lending practices that ultimately led to the housing bubble and the global recession, is now taking dead aim at what he believes is setting the stage for the next financial crisis – a US dollar asset bubble. On Monday, Professor Roubini told CNBC that we are headed for the “mother of all

Failing Banks Support Dollar Appetite

2009-11-03T06:11:00.000-08:00

Just when you thought it was safe to get back into the water, along comes another bailout to test your risk appetite! European banks (RBS, Lloyds, and UBS etc) continue to provide evidence that the financial industry is far from recovery. Look on the bright-side both RBS and Lloyd’s will get $31b if they put a cap on bonuses! You require $31b from the tax payer for a second time and you expect to get a bonus! That’s a good

I Love it When a Plan Comes Together!

2009-11-03T06:10:00.002-08:00

Like Hannibal from the A-team, its always a good feeling when your thesis plays out AND you are able to profit from it. Thanks to the Case-Shiller housing price number (home prices increased- woohoo!) the Dow jumped up about 60 points and the dollar sold off a bit just in time to activate some shorts.
I took small short positions in AUD/USD, EUR/USD, and GBP/USD, as well as a long in USD/CAD. Then the consumer confidence number came in at 47.7 vs. and expected 53.1. , and the Dow sold off about 80 points in 10 minutes, thereby giving me gains in all of my currency positions. Exactly as expected.
Unfortunately, the action was just too fast for me to even get my charts posted! Here’s one chart of the GBP/USD short.

Risk Aversion Rules the Morning!

2009-11-03T06:10:00.001-08:00

This means there is strength in USD and JPY, and weakness in the commodity currencies, with the yen leading the way. Yen crosses are the biggest gainers (AUD/JPY -1.8%), (NZD/JPY -1.85%), (CAD/JPY -1.25%). There’s also some strength in the British Pound (GBP) today as well.
A little later on I’m going to look at some charts, to update some older trades I talked about and to show some new ones and the effects these are going to have on other markets as well.
So check back later today!

What Defines Risk in Currencies!

2009-11-03T06:09:00.002-08:00

As I mentioned earlier this morning, today’s trading in the currency market is all about risk aversion. JPY and USD continue to strengthen against the commodity currencies (AUD, NZD, CAD). By looking at these numbers, I would expect the US equity markets to be down A LOT more. Yet at this writing, the Dow is down 17 points, the S&P 500 down 8 points, and the Nasdaq down 25 points. What gives?
Usually, a strong move in JPY and USD will accompany a larger sell-off in the equities indices, and vice versa. Yet the stock market “sell-off” is well within its normal daily trading ranges. The charts on the Aussie look like its poised to go down further, so could this be foreshadowing the stock market sell-off everyone seems to now be predicting?
One of the strange “ironies” about the currency market is the difference between risk-taking and risk-aversion. Take the current market, for example. When trading currency pairs, you are essentially trading one currency in relation to another. So in this regard, you typically want to own the stronger pair and sell the weaker pair. Usually the stronger pair is paying higher interest than the weaker pair, so you actually earn interest in this type of situation, otherwise known as a carry trade.
So let’s take a look at two “hypothetical” countries and their respective currencies.
Currency A: This country’s currency is very weak, yields almost no interest (ZIRP), its banks are questionable as to solvency, its economy is teetering on the brink of disaster, it is taking on debt like its going out of style, and confidence is near an all-time low.
Currency B: This country was largely unaffected by the credit crisis and the Great Recession, just raised its benchmark rate 25 bp to 3.25%, is currently worried about too fast a recovery and inflation, and appears to have its fiscal house in order.
So which currency is “riskier”, A or B? If you said ‘A’, then you are WRONG!
In this example, Currency A is the US dollar and Currency B is the Aussie. So it sometimes seems comical that in order to avoid risk, you would sell a higher yielding currency from a financially sound country in favor of a declining wreck with no interest from the country with possibly the worst fiscal situation on the planet!
Yet that’s how it goes. For now. Obviously its because of the status of USD as the world’s reserve currency that makes this “flight to safety” trade happen, but I wonder at what point people start to realize that earning interest in Australia is the real “flight to safety”.

Recent Aussie Trades Revisited!

2009-11-03T06:09:00.001-08:00

Its blatantly obvious that today’s market theme has been about risk-aversion and flight to “safety”, but I just wanted to take a closer look at the Aussie. In my last post I mentioned all of the reasons why the Aussie should be consider the “safe” currency, yet it is getting clobbered today as the stock market sell-off is relatively benign (as of this time of writing).
One of the reason’s (outside of the technicals- which I’ll get to in a minute as I DID promise you charts today) for such weakness today is the inflation reading which came in last evening. While inflation did check in higher than expected, the increase was not enough to warrant a 50 basis point (bp) rise in rates, so now the expectation is for “only” 25 bp when the RBA meets next week.
Considering the interest currently being offered in other parts of the world, this is STILL pretty good for savers seeking higher yields.
So let’s look at the updated charts for 2 short-term trades I called out last week, long GBP/AUD and short AUD/USD. While the trades were intended to be short-term in nature (the AUD/USD being a day-trade), I probably would have held a little longer had the stock market responded a little more negatively.
So here’s GBP/AUD (click chart to enlarge):

Last week I called a possible reversal on this trade when the trend was clearly down on the daily charts, then mentioned a cup & handle formation on the 4-hour chart. When I saw the bullish pattern on the shorter time-frame, I reduced my holding period for the trade and was able to take some profits before being stopped out.
Based on today’s action, tightening my stop was clearly a mistake. And while you’re never going to go broke taking profits, missing the big moves can sometimes be as equally painful as losing. Looking at this chart, the first fibonacci level at 38.2% is just above 1.84, and I called my original target at 1.835. So those would be the first two levels I would look to take profits on.

Adv. GDP due at 8:30AM EST

2009-11-03T06:08:00.003-08:00

Economists surveyed expect the first expansion in almost a year to 3.2%.

Adv GDP comes in at 3.5%!

2009-11-03T06:08:00.001-08:00

Stock futures have spiked so that a much stronger start to the session appears to be in order. The improved tone comes in the wake of the latest dose of data. According to the advance third quarter GDP report, economic output increased at an annualized quarter-over-quarter rate of 3.5%, which is better than the 3.2% increase that was expected. That’s a sharp upturn from the 0.7% decline that was registered in the second quarter. Personal consumption during the third quarter was considerably strong. It came in with a 3.4% increase, which is better than the 3.1% increase that was widely expected and up from the 0.9% decline that was posted in the second quarter. Separately, initial jobless claims for the week ending October 24 came in at 530,000, which is a bit more than the 525,000 initial claims that economists had come to expect. The latest tally was essentially in-line with the previous week’s tally of 531,000. Meanwhile, continuing claims fell to 5.797 million from 5.945 million. (from yahoo finance)
So with the “fear” from this number abated, stocks up, US dollar (USD) and Japanese yen (JPY) down as risk-taking is back in play! Top gainers so far are Aussie (AUD) and Kiwi (NZD), as should be expected.
Take a look at the 5-min chart of AUD/USD (click chart to enlarge)

Having fun yet? Now up 60 pips in 20 minutes!
Now that the US economy appears to be recovering, with the first quarter over quarter growth in nearly a year, the carry trade is back on in full force as Australia is the place to be for yield seeking investors.
To learn more about how to do a carry trade, please check out our currency trading courses!

Canada’s GDP Shrinks!

2009-11-03T06:07:00.002-08:00

Canadian GDP unexpectedly fell .1%, vs. a .1% gain analysts had expected. This is significant because it means that Canada may not be exiting the recession as fast as they and others had hoped. As a result, interest rates are expected to remain at the record-low .25% for some time to come. As can be expected, the Canadian dollar (CAD), otherwise known as the “Loonie”, is down across the board, most notably against the Yen (-1.48%), the US dollar (-1.19%), and the Euro (-1.08%).
BOC Governor Carney has been talking down the Loonie as it came close to parity with USD in mid-October; I guess this was a little more than just jaw-boning. So while the Canadian economy is still technically contracting, this doesn’t appear to be a major miss that is going to send them down further. If they get a bit of currency relief, that will help their exports so look for them to exit recession next quarter.

BOJ to End QE Program!

2009-11-03T06:07:00.001-08:00

The Japanese yen (JPY) is strengthening today as the Bank of Japan announced it will stop buying corporate debt by the end of this year. This essentially means that they will stop flooding the market with yen, which in turn means supply will be less, which should translate into higher yen values.
JPY is up today, most notably against the commodity currencies. What’s going to be interesting is how far the BOJ will let the yen strengthen before the talks of intervention begin to surface again. There is still lingering deflation in Japan, so don’t expect an interest rate hike anytime soon. However, Japan appears to be emerging from the recession as unemployment has fallen to a 4-month low and household spending has impoved.
But a strong yen affects Japanese exports so it will be interesting to see the battle between the philosophies of the BOJ and the finance ministry play out.
So I’m watching and waiting!
To learn about how government policy decisions affect currencies, be sure to check out our currency trading courses!

Blog Review at DailyForex

2009-11-03T06:06:00.000-08:00

I just wanted to take a moment to thank Hillel at DailyForex for taking the time to review my blog. I guess my Mom is not the only one who thinks I’m pretty great LOL! All kidding aside, you can read the review here.
One thing I did want to note about the review is that while I typically don’t offer tutorials on the blog for newbies, I do assume that my readers have a certain level of currency understanding and basic knowledge.
And that’s my role here at FXEDU. I am an instructor. It is my job to make sure that you, the reader, understand the currency market and are comfortable placing trades and participating in the largest financial market in the world.
It is my opinion that a little bit of knowledge can be dangerous in the “wrong” hands. And by wrong I mean “uneducated”.
It is very true that there is a lot of good, free information out there on the internet. But the problem for the novice trader is that it is very unorganized. Because of the nature of being new to something, one might not necessarily know what they should be looking for and could miss very basic, fundamental information that could be critical for their success.
And that’s what we do in our courses. I’m not here to act like some big-shot guru and promise you wild success and if you follow my methods that you’re going to be rich, etc. like you see out there on the internet.
What you’re going to get in our courses is a step by step plan that will take you from start to finish, and help you put together a trading plan that is right for you. The course is an online format, and you have access to our instructors 24-hours a day to ask as many questions as you like. So you can take the course on your own time, at your own pace. And its affordable. Only $100. If you are serious about getting started in forex, our course is the greatest value out there on the internet.
And it won’t cost you an arm and a leg. But it just might save you one. So what are you waiting for???
Get enrolled in a course today!!!
Click here to see all of courses.

Aussie Trade Getting Crowded!

2009-11-03T06:05:00.000-08:00

Well it looks like everyone is starting to catch on to the Aussie trades I have been trumpeting for weeks. Here’s a good take from Bloomberg about all of the reasons why this trade makes so much sense. Why do I bring this up?
Well, tommorrow its expected that Reserve Bank of Australia (RBA) is going to raise rates another 25 basis points to 3.5% on its benchmark rate. While this is good news for those who hold Australian dollars, my contrarian nature tells me that it may be time to lighten the load a bit.
Generally speaking, when everyone else wants to be a buyer, I want to be a seller. And vice-versa. So I’ll be keeping an eye on the Aussie pairs. While we’ve gone over the risk trade ad nauseam, because the forex market is forward-looking (most are), this rate hike may very well be priced in.
Also to note is that while Australia appears to be exiting the recession, other countries are sure to follow suit and may begin raising rates as well. So there are alot of factors going on here which could affect this currency.
So its when things appear to be rosiest is when I tend to exercise caution. Will be interesting to see how this plays out!

Yell jumps as it finally gets bankers' debt agreement

2009-11-03T04:01:00.004-08:00

It was a long and drawn out affair, with a number of missed deadlines, but Yell has finally reached agreement with its lenders, paving the way for a £500m