Global Forex

FOREX Daily Outlook

2010-12-15T13:33:00.000-08:00

Stock markets Around the World Extending Gains

U.S. Dollar Trading (USD) was on the back foot in the risk on environment with the market selling before the FOMC statement but buying back after. Strong November Retail Sales at 0.8% vs. 0.6% helped to push US stocks to fresh year highs. In US stocks, DJIA +47 points closing at 11476, S&P +1 points closing at 1241 and NASDAQ +2 points closing at 2627. Looking ahead, November CPI is forecast at 0.2% vs. 0.2% previously.

The Euro (EUR) tested 1.3500 in the European session but failed at the key resistance and pulled back into the US FOMC statement and extended the pullback afterwards when the Dollar rallied. German ZEW survey improved at 4.3 vs. 1.8 previously. EUR/USD traded with a low of 1.3354 and a high of 1.3500 before closing at 1.3370.

The Japanese Yen (JPY) tested below Y83 before stronger US Retail Sales helped the pair begin to rally when US bond yields increased after the FOMC. The US and Japan have similar Interest Rates at near 0% so any move higher in US interest rate expectations has a major effect. Overall the USDJPY traded with a low of 82.82 and a high of 83.86 before closing the day around 83.60 in the New York session. UPDATE Q4 Tankan Manufacturing Index at 5 vs. 8 previously.

The Sterling (GBP) Strong CPI at 0.4% m/m in November pushed yearly figures to 3.3% and supported Cable as it tested 1.5900 in Early Europe. The mood changed dramatically however as EUR/GBP began to rally and USD found strength with market falling sharply back below 1.5800. Overall the GBP/USD traded with a low of 1.5737 and a high of 1.5914 before closing the day at 1.5760 in the New York session. Looking ahead, November Claimant Count is forecast at -3k vs. -3.7k previously.

The Australian Dollar (AUD) did well in the risk on trading breaking above 1.0000 and overcoming much of the USD strength to close just under parity. AUD/JPY push in the Y83 level comfortably and AUD/NZD is remaining near Year highs on NZD underperformance. Overall the AUD/USD traded with a low of 0.9941 and a high of 1.0031 before closing the US session at 0.9980.

Oil & Gold (XAU) Gold pushed above $1400 but reversed sharply above the level to finish unchanged. Overall trading with a low of USD$1391 and high of USD $1408 before ending the New York session at USD$1395 an ounce. Failed twice at $89 and pulled back to lower $88 supports. WTI Oil Closed -$0.46 at $88.15 a barrel.

TECHNICAL COMMENTARY

Currency	Sup 2	Sup 1	Spot	Res 1	Res 2
EUR/USD	1.3183	1.3303	1.3355	1.3626	1.3634
USD/JPY	81.66	82.34	83.85	84.41	85.40
GBP/USD	1.5581	1.5712	1.5760	1.5911	1.5965
AUD/USD	0.9833	0.9943	0.9955	1.0031	1.0091
XAU/USD	1380.00	1392	1396	1431	1438
OIL/USD	87.00	88.00	88.10	89.50	90.00

Euro – 1.3355

Initial support at 1.3303 (61.8% retrace of 1.3183-1.3499) followed by 1.3183 (Dec 13 low). Initial resistance is now located at 1.3626 (50% retrace of 1.4282-1.2969) followed by 1.3634 (Nov 23 high)

Yen – 83.85

Initial support is located at 82.34 (Dec 7 high) followed by 81.66 (Nov 12 low). Initial resistance is now at 84.41 (Nov 29 high) followed by 85.40 (Sept 24 high).

Pound – 1.5760

Initial support at 1.5712 (Dec 9 Low) followed by 1.5581 (Dec 3 low). Initial resistance is now at 1.5911 (Dec 14 high) followed by 1.5965 (Nov 23 high).

Australian Dollar – 0.9955

Initial support at 0.9943 (Dec 14 low) followed by the 0.9833 (Dec 13 low). Initial resistance is now at 1.0031 (76.4% retrace of 1.0183-0.9537) followed by 1.0091 (Nov 11 high).

Gold – 1396

Initial support at 1392 (Dec 14 low) followed by 1380 (Dec 13 low). Initial resistance is now at 1431 (Dec 7 high) followed by 1438 (1329.70 plus 1315.45-1424.60).

Oil – 88.10

Initial support at 88.00 (Intraday Support) followed by 87.00 (Intraday Support). Initial resistance is now at 89.50 (Intraday Resistance) followed by 90.00 (Intraday Resistance).

Some Words and Some Knowledge Regarding the Foreign Exchange Market

2010-12-09T12:02:00.003-08:00

Whether you call it Forex or Fx, you are talking about the Foreign Exchange market. This is where the trading of currencies, one against the other, is done. To have an idea just how big the action is, add all the stock exchanges in the world together and the Foreign Exchange will still be bigger!When you consider that various speculators, hedge funds, governments as well as companies, plus countless private investors who take part, it is hardly surprising that this market is so strong and that the estimated daily average turnover of the foreign exchange market is over 3 trillion US Dollars.THE SPOT RATE is by far the most asked for. This transaction has to be settled within two business days.With London, New York, Tokyo, Frankfurt and Sydney as the chief trading centres, the action hardly ever closes.BID refers to the price at which the buyer is repared to buy the currency.It is like when you are at an auction and you are puttong your hand up to say you are willing to purchase something at that price.OFFER means the price at which an amount of currency the seller is ready to sell.LIMIT ORDER is when you give instructions the buy or sell a currency at a predetermined exchange rate.INTER BANK RATES means the bid and exchange rates when international banks buy and sell between themselves. SPREAD is the difference between the bid and ask price of a currency.STOP LOSS is when an order is given to purchase or sell a currency at a price level set by the client on a particular trade which if reached, will close out the particular position at the stated price. TRANSACTION DATE is the date on which a foreign exchange trade is being done.SETTLEMENT DATE is the date which foreign exchange contracts settle.Every currency has a three letter code such as for the Euro (EUR), for the British Pound (GBP), for the US Dollar (USD), for the Japanese Yen (JPY), for the Australian Dollar (AUD), for the Swiss Franc (CHF), for the Canadian Dollar (CAD). Actually, these are the major trading currencies and all commonly traded currencies are called the majors.CABLE is a name given to the US Dollar/British Pound rate in the foreign exchange market.EFT is the Electronic Fund Transfer which is the transfer of money between banks.When there is a quote in currency pairs, remember that the first currency is called the base currency. The second currency is called the counter currency. As an example when you get a quote GBP/USD at 1.96 it means that for one GBP you will get 1.96 USD. So for ten thousand pounds you will get nineteen thousand six hundred US Dollars.The many foreign currency exchange companies which you can find on the internet will gladly give you a quote, and by phoning around you can find the best currency rates. They will be better than a high street bank is likely to offer and they will give you a very fast service. Furthermore, most of them will not charge you any commission or the cost of the electronic bank transfer.

Forex Trading Rules

2010-12-09T12:02:00.001-08:00

1. Emotional control is at the heart of good trading.2. Cut losses with the most strict discipline3. Make good decisions and winning will take care of itself.4. When you lose, don't lose the lesson!5. When in doubt, get out.6. Keep your risk/reward profile in check.7. Avoid scheduled news.8. Consider your account size for appropriate trading.9. Get a charting program that allows you to build watch lists, sort stocks, and draw trendlines.10. Scale out of winning positions as they work for you.11. Don't dig yourself into a hole early in the day or in your career.12. Trade with a blend of anticipation and confirmation.13. Evaluate your results at least monthly.14. Finally (perhaps most important), always be patient.15. Invest on the side that is winning16. The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.17. Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.18. Markets can remain illogical far longer than you or I can remain solvent.19. To trade/invest successfully, think like a fundamentalist; trade like a technician.20. Grow Slowly But Strongly "Pip-Machine

Online Currency Trading Requires Patience

2010-12-09T12:01:00.002-08:00

When the going gets tough, the tough get going. This adage often brings back the memories of my past days when I was trading initially in the currency exchange market. Indeed, there's nothing more hurtful than losing your invested money in the FX market. But, online currency trading is like life where you're got to learn from your wrong moves and keep moving on. Learning the basic skills of online forex trading could be easy but, practically, one needs to acquire the advanced skills to play safe through thick and thin of FX trading.I have traded in forex for many years and, if you count on me, I must tell you that the secret of successful trading lies largely on the hunch and intuition of an trader. Technically expressed, you should have the accurate forex alerts and forex signals to be able to make the right moves in the currency market. However, this is easier said than done as the skills of the Currency Trading Signal takes a long time to master. This is why while a few people are able to boost their forex pips in a short span of time, the others take a long time to achieve the same or maybe, some of them get frustrated and just give it up! The reality is that not many people are ready to be entirely devoted to the perilous process of online forex trading.Having said this, I still wonder why some people choose to be a dare-devil and risk their money instead of simply following an established and renowned Account Forex Online Trading. I began trading in 1997 and there is one important thing I have learnt in my trading career so far, i.e., you have to got to be patient to learn the tricks of making right moves at the right times and profit from your trading.Since I have led quite a successful career in forex trading, I have been sharing the tips and tricks of online currency trading with many traders around the world through my G7 Forex Trading System which as you know has remained pretty successful for many traders so far. My G7 Forex Trading System is an easy-to-follow, step-by-step trading manual offering in-depth online forex trading review.If you visit my site (www.forex-science.com) you will find many of my existing customers are pretty satisfied with the performance of their investments and in fact, most of them have been able to increase their forex pips drastically. You would be surprised to know quite a few of them haven't traded for a long time! Now, this is what we call success in the forex trading, eh?

Knowing Some Words Used in Electronic Money Transfer

2010-12-09T12:01:00.000-08:00

Electronic money transfers are not only used in connection with foreign currency exchange payments, but in a host of other payments especially when larger amounts are involved such as property, cars, boats, in fact anything.Nowadays, EUROPEAN CROSS BORDER PAYMENTS are made easier for the parties to send, thanks to the use of IBAN which means International Bank Account Number for short.IBAN is a bank code which identifies the account number and additional characters,thus avoiding possible mistakes..It must be noted however, that its validation is no guarantee that the account number or bank code is correct or that it exists.It is the responsibility of the account owner to notify their IBAN to the party they wish to deal with.The IBAN is given for the account by the bank serving that account, and should only be taken from that bank. It prevents getting possible incorrect IBAN details, as this can cause delay in receiving payment. Nobody wants any delays when making foreign currency exchange payments.Companies dealing with international money transfers are very exact and are eager to change one currency against the other as fast as they possibly can, to complete the deal and show their clients how smoothly and quickly they perform.The bank identification code BIC is another abbreviation, which you will come across.BIC is a way of being able to identify financial institutions so that the process of telecommunication in financial institutions/banks is facilitated.In order to make a payment, it is required to quote the IBAN and BIC. The use of IBAN became compulsory since July 2003.Most people have heard of the abbreviation SWIFT, which stands for Society for Worldwide Interbank Financial TelecommunicationSWIFT is a global provider of secure financial messaging service. It is this service that foreign currency exchange companies use to move the money bank to bank. It is also the same service constantly used to move millions of pounds and other currencies by countless other financial institutions. It is fast and safe.CHAPS or in short The Clearing House Automated Payment System is an electronic same day value payment in sterling, and within the United Kingdom.It is to be remembered that banks make a charge for the electronic payment transfers.In contrast, almost all foreign currency exchange companies do not make a charge for outward electronic payment transfers.When making foreign exchange currency transfers you will simply need to fill in a form, which the company you select to do the business with will provide. The few above mentioned details, serve only to inform those, who wish to know what certain abbreviations actually stand for, plus a little explanation here and there.

New month with old concerns

2010-12-07T13:50:00.000-08:00

Market moving on old stories
Australia has new PM Gillard but the aussie is not celebrating
No surprise with RBA or BoJ decisions
Sterling watching gilt market for directional clues
UK retail sales survey suggests modest August growth

The main stories in the early part of the week appear to be old ones that have been dusted off, slightly refreshed and sent out once again. The euro’s weakness overnight is owing to reports that the EU bank stress tests did not reveal all of the government debt they are holding (Wall Street Journal). This follows on from reports yesterday that German banks may require more capital. Furthermore, the BIS report of yesterday reminded us that the private sector deleveraging has a long way to go, with implications for both growth and currencies. The main thing is to determine what is old news, what is speculation and what is a change of circumstances, although the trouble is that markets can move on all three, to varying degrees)

Commentary

Euro weakness in Asia session. The main standout overnight is the weakness of the euro, having moved from 1.2875 to near 1.2800 at the start of the European session. The Wall Street Journal is reporting that European banks have more government debt on their books than was reported in the EU bank stress tests back in July. This follows on from reports yesterday that German banks could need a further ₨ 11,500 (EUR 105)bn fresh capital if higher capital requirements are brought in on the back of BIS proposals. In our view, all old news polished up to look fresh.

Australia has a (coalition) government. After over two weeks of negotiations, Australia has a new government, with current PM Gillard having secured enough support from independents to keep her labour party in power. The aussie was modestly weaker on the news, moving back towards the 0.91 level vs. the USD into the European open. The key concern going forward is with policy and also the extent to which independents and minorities are going to hold back decision making. Time will tell, but for now the aussie is softer.

Eyes on the gilt market for sterling. There are around ₨ 1,200 (GBP 9)bn of coupon payments to be made this week in the UK bond market. This was one of the reasons attributed to sterling’s weak performance at the start of the week, the main issue being the extent to which overseas investors re-invest proceeds back into the market. Gilts are trading fairly tight to Bunds at present, the 10yr yield over Germany around 70bp not that far from the narrowest levels for the year to date. It could be that investors are viewing gilts as a little rich right now and are looking to scale back, especially ahead of the October spending round when there is some risk that the government will struggle to credibly deliver the spending decision announce in June. Note that Monday was the fifth consecutive day of sterling weakness vs. the euro, a pattern not seen since the early part of July, with the 0.84 level on EUR/GBP within the market’s sight.

RBA and BoJ decisions in line. There were never any big risks with either one, especially the BoJ’s after their emergency meeting last week. Australia’s decision to keep key rates at 4.5% did see AUD/USD weaken modestly.

UK retail sales slightly firmer. The rise in the British Retail Consortium’s like-for-like measure of retail sales is nothing to get too excited about, with the YoY reading rising from 0.5% in July to 1.0% in August. All in all, whilst strong conclusions are difficult, the data does fit the picture of a more subdued third quarter.

UK car registrations fall further. The 17.5% YoY print in August was not that much of a surprise, given the ending of buyer incentives earlier in the year. Registrations were running 30% down YoY in the early part of the credit crises, so whilst August’s reading was a further fall, the pace of decline is slowing. Low and often negative real-wage growth, alongside tighter financing conditions, looks set to continue to act as a brake on the market for the remainder of the year and most likely into 2010 as well.

Bad and good news from the BIS. The Bank for International Settlements quarterly report is always a fairly good overview of financial markets’ developments, if not predicting them, then at least putting them into context. Their point on the necessary household deleveraging has been made often before, but more than three years after the start of the credit crunch, it can sometimes be pushed to the back of the picture as investors scrabble to find signs of economic recovery. For example, in the post-war period, US household debt as a proportion of GDP has averaged just over 50% but, apart from a modest fall in 1965-75, has been on a fairly relentless rising trend. There are various ways of measuring it but, from a peak of 98% of GDP in early 2009, it’s falling to around 94% (Q1 2010). The average prevailing over the last cycle was 87% and, given that was a credit boom, it would make sense that the natural level is lower than that (even though knowing what this should be is rather difficult to determine). So, the bad news is that there is a lot more debt to be paid off. The good news is that the BIS says that this is not necessarily bad for growth. Indeed, they say that growth does rebound quickly in a lot of their examples, whilst debt ratios are still falling. In terms of currencies, those economies that can deleverage and rebalance away from consumption more towards investment and net exports should do better, but not all currencies can win that game (of those that need to play it, principally the US and UK), so those pushing the reform path harder should win out in the long-term.

Looking Ahead

Tuesday: JPN: BOJ Meeting (expect no change in overnight target rate, currently 0.1%); UK: BRC Retail Sales Monitor, August; GER: Factory Orders, July (expect 0.6% MoM and 20.8% YoY, previous 3.2% and 24.6%).

Wednesday: JPN: M3 Money Supply, August (expect 2.6%, previous 2.7%); Machine Orders, July (expect 2.0% MoM, previous 1.6%); Current Account, July (expect ₨1,576 (JPY1.534)trln, previous ₨1,076 (JPY1.047)trln); Trade Balance, July (expect ₨889 (JPY865)bn, previous ₨790 (JPY769)bn); GER: Trade Balance, July (expect ₨1,424 (€13.0)bn, previous ₨1,544 (€14.1)bn); Industrial Production, July (expect 1.0% MoM, previous -0.6%); FR: Trade Balance, July (expect -₨460 (€4.2)bn, previous -₨427 (€3.9)bn); BOF Business Sentiment index, August (expect 101, previous 101); UK: Industrial Production, July (expect 0.4% MoM, previous -0.5%); NIESR GDP estimate, Q3; CAN: BOC meeting (expect rates to remain unchanged); Building Permits, July (expect -6.0% MoM, previous 6.5%); IVEY PMI, August (expect 55.5, previous 54.0); US: MBA Mortgage Applications; Fed Beige Book; Consumer Credit, July (expect -₨465 ($5.4)bn, previous -₨112 ($1.3)bn)

Thursday: JPN: BSI Large All Industry (previous 4.0); Households Consumer Confidence, August (expect 43.6, previous 43.3); FR: Non-farm Payrolls, Q2 f (expect 0.2% QoQ); GER: CPI, August final (expect 0.0% MoM and 1.0% YoY); EC: September Monthly Report; UK: Trade Balance, July (expect -₨435 (£3.3)bn, previous -₨429 (£3.26)bn), MPC Meeting (expect no change in rates or asset purchases); CAN: Housing Starts, August (expect 184.5K, previous 189.2K); International Merchandise Trade Balance, July (expect –CAD1.0bn, previous –CAD1.1bn); US: Trade Balance, July (expect -₨4,130 ($48.0)bn, previous -₨4,294 ($49.9)bn); Initial Claims (expect 470K, previous 472K).

Friday: JPN: GDP, Q2 f (expect +0.4% QoQ, previous estimate 0.1%); GDP Deflator, Q2 final (expect -1.8%); FR: Industrial Production, July (expect 0.7% MoM and 5.0% YoY, previous -1.7% and 5.7%); IT: Industrial Production, July (expect 0.3% MoM, previous 0.6%); GDP, Q2 f (expect 0.4% QoQ and 1.1% YoY); UK: PPI Input Prices, August (expect 0.2% MoM and 9.0% YoY, previous -1.0% and 10.8%); PPI Output Prices, August (expect 0.1% MoM and 4.8% YoY, previous 0.1% and 5.0%); CAN: Net Change in Employment, August (expect +17.8K, previous -9.3K); Unemployment Rate, August (expect 8.0%, previous 8.0%).

Source: Bloomberg

Disclaimer: This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. FxPro does not take into account your personal investment objectives or financial situation. FxPro makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any employee of FxPro, a third party or otherwise. This material has not been prepared in accordance with legal requirements promoting the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and may not reflect the opinions of FxPro. This communication must not be reproduced or further distributed without the prior permission of FxPro.
Risk Warning: Forex and CFDs are leveraged products and incur a high level of risk and may not be suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take into account your level of experience and seek independent advice if necessary.

Risk aversion in forex

2010-12-07T11:39:00.004-08:00

Risk aversion in the forex is a kind of trading behavior exhibited by the foreign exchange market when a potentially adverse event happens which may affect market conditions. This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty.[22]

In the context of the forex market, traders liquidate their positions in various currencies to take up positions in safe haven currencies, such as the US Dollar.[23] Sometimes, the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics. An example would be the Financial Crisis of 2008. The value of equities across world fell while the US Dollar strengthened (see Fig.1). This happened despite the strong focus of the crisis in the USA.[24]

Speculation

2010-12-07T11:39:00.002-08:00

Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[17] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[18]

Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors [19].

Currency speculation is considered a highly suspect activity in many countries.[where?] While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[20] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[21]

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.
[edit]

Financial instruments

2010-12-07T11:39:00.000-08:00

Spot

A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.
[edit] Forward
See also: forward contract

One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.
[edit] Swap
Main article: foreign exchange swap

The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.
[edit] Future
Main article: currency future

Foreign currency futures are exchange traded forward transactions with standard contract sizes and maturity dates — for example, $1000 for next November at an agreed rate [4],[5]. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.
[edit] Option
Main article: foreign exchange option

A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world..

Determinants of FX rates

2010-12-07T11:38:00.001-08:00

The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):

(a) International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.

(b) Balance of payments model (see exchange rate): This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.

(c) Asset market model (see exchange rate): views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”

None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
[edit] Economic factors

These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.

* Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
* Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
* Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
* Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
* Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
* Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector [3].

[edit] Political conditions

Internal, regional, and international political conditions and events can have a profound effect on currency markets.

All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency.
[edit] Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

* Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven." There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.[13]
* Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.[14]
* "Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[15] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
* Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
* Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.[16]

[edit] Algorithmic trading in foreign exchange

Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.[citation needed]

Trading characteristics

2010-12-07T11:35:00.001-08:00

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism.[citation needed]

The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.

Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. Historically, the base currency was the stronger currency at the creation of the pair. However, when the euro was created, the European Central Bank mandated that it always be the base currency in any pairing.

The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

* EURUSD: 27%
* USDJPY: 13%
* GBPUSD (also called cable): 12%

and the US currency was involved in 84.39% of transactions, followed by the euro (39.1%), the yen (19.0%), and sterling (12.9%) (see table). Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies.

Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

Market participants

2010-12-07T11:34:00.001-08:00

Unlike a stock market, 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.
[edit] Banks

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 large 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.[citation needed]
[edit] Commercial companies

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.
[edit] Central banks

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. 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.
[edit] Forex Fixing

Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks, dealers and online foreign exchange traders use fixing rates as a trend indicator.

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.
[edit] Hedge funds as speculators

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.
[edit] Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
[edit] Retail foreign exchange brokers

Retail traders (individuals) constitute a growing segment of this market, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams.[8][9] To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone.

There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at—the customer has the choice whether or not to trade at that price.

In assessing the suitability of an FX trading service, the customer should consider the ramifications of whether the service provider is acting as principal or agent. When the service provider acts as agent, the customer is generally assured of a known cost above the best inter-dealer FX rate. When the service provider acts as principal, no commission is paid, but the price offered may not be the best available in the market—since the service provider is taking the other side of the transaction, a conflict of interest may occur.
[edit] Non-bank foreign exchange companies

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account. Send Money Home offers an in-depth comparison into the services offered by all the major non-bank foreign exchange companies.

It is estimated that in the UK, 14% of currency transfers/payments[10] are made via Foreign Exchange Companies.[11] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
[edit] Money transfer/remittance companies

Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange & Financial Services Ltd.[citation needed]

Market size and liquidity

2010-12-07T11:33:00.000-08:00

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$3.98 trillion in April 2010 by the Bank for International Settlements.[3]

Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.85 trillion, or 36.7% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York City accounted for 17.9%, and Tokyo accounted for 6.2%.[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.

FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Top 10 currency traders [5]
% of overall volume, May 2010 Rank Name Market share
1 Germany Deutsche Bank 18.06%
2 Switzerland UBS AG 11.30%
3 United Kingdom Barclays Capital 11.08%
4 United States Citi 7.69%
5 United Kingdom Royal Bank of Scotland 6.50%
6 United States JPMorgan 6.35%
7 United Kingdom HSBC 4.55%
8 Switzerland Credit Suisse 4.44%
9 United States Goldman Sachs 4.28%
10 United States Morgan Stanley 2.91%

Foreign exchange trading increased by over a third in the 12 months to April 2010 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 2009, retail traders constituted over 5% of the whole FX market volumes (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 TheCityUK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the IMF calculates the value of its SDRs every day, they use the London market prices at noon that day

Foreign exchange market

2010-12-07T11:32:00.000-08:00

The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1]

The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries.[2]

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 began 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.

The foreign exchange market is unique because of

* its huge trading volume, leading to high liquidity;
* its geographical dispersion;
* its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
* the variety of factors that affect exchange rates;
* the low margins of relative profit compared with other markets of fixed income; and
* the use of leverage to enhance profit margins with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding market manipulation by central banks.[citation needed] According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007.

The $3.98 trillion break-down is as follows:

* $1.490 trillion in spot transactions
* $475 billion in outright forwards
* $1.765 trillion in foreign exchange swaps
* $43 billion currency swaps
* $207 billion in options and other products