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SPOT FOREX
The Foreign Exchange may be traced back to the early stages of history, possibly beginning with the Ancient Egyptians' introduction of coinage, and the Babylonians' notes. Certainly by biblical times the Middle East saw a form of rudimentary international monetary system when the Roman gold coin 'aureus' gained 'world wide' acceptance followed by the silver 'denarius,' both a common stock among money changers of the period. By the Middle Ages, foreign exchange became a function of international banking with the growth in the use of bills of exchange by the merchant princesses and international debt papers in the course of their underwriting the period's wars by the budding European powers.
The Gold Standard, 1816-1933
The 'gold standard' was a fixed commodity standard where participating countries fixed a physical weight of gold for the currency in circulation making this directly redeemable in the form of the precious metal. In 1816 for instance, the pound sterling was defined as 123.27 grains of gold on its way to becoming the foremost reserve currency and was the principal component of the international capital market. This led to the expression 'as good as gold' when applied to the Sterling, as the Bank of England at the time gained stability and prestige as the premier monetary authority.
Of the 'majors,' the US dollar adopted the gold standard late in 1879 and became the standard-bearer replacing the British Pound when Britain and the other European countries came off the system with the outbreak of World War I in 1914. Eventually, though, the worsening international depression lead even the dollar off the gold standard by 1933 marking the period of collapse in international trade and financial flows prior to World War II.
The Bretton Woods System, 1944-73
The post World War II period saw the British economy in ruins with infrastructure bombed, so too was confidence with their currency at a low. On the other hand, the US with its physical isolation was left relatively unscathed by war, its industrial might ready to be turned to civilian purposes. This then has lead to the dollars rise to prominence becoming the reserve currency of choice and staple to the international financial markets.
Bretton Woods came about in July 1944 when 45 countries attended at the behest of the US a conference to formulate a new international financial framework, aimed at ensuring prosperity in the post war period and to prevent the recurrence of the 1930s global depression. Named after a resort hotel in New Hampshire, the Bretton Woods system formalized the role of the US dollar as the new 'global' reserve currency with its value fixed into gold and the US assuming the responsibility of ensuring convertibility while other currencies were pegged to the dollar.
Among the key features of the new framework were :
- fixed but adjustable exchange rates.
- the International Monetary Fund
- the World Bank
The End of Bretton Woods and Floating Exchange Rates
After close to three decades of running the international financial system, Bretton Woods finally went the way of history on growing structural imbalances among the economies leading to mounting volatility and speculation in a one-year period, from June 1972 to June 1973. At the time the UK, facing deficit problems initially floated the Sterling, then devaluating further on in February of 1973 loosing 11 per cent of its value along with the Swiss Franc and the Japanese Yen. This eventually lead to the European Economic Community floating their own currencies as well in the end.
At the core of Bretton Woods problems were deteriorating confidence in the dollars ability to maintain full convertibility and the unwillingness of surplus countries to revalue for its adverse impact in external trade. Despite a last ditch effort by the Group of Ten finance ministers through the Smithsonian Agreement in December 1971, from 1973 onwards the international financial system saw market-driven floating exchange rates taking hold. Several times efforts for reestablishing controlled systems were undertaken with varying levels of success, the most well known of which Europe's Exchange Rate Mechanism of the 1990's that eventually lead to monetary union and today's 12 nation Euro.
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We would like to give you a closer look of the forex market and how it can work for your investments. Contact us for a personal meeting with one of our staff. We have people that will discuss this exciting investment opportunity with you anytime. Meanwhile, read through the following note to give you a basic idea of the FOREX market. |
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The foreign exchange market currently is the largest financial market in the world, with over $1.5 trillion dollars changing hands daily and soon expected to top $2 trillion. Unlike other financial markets, the FOREX market has no physical location and no central exchange. It operates on a 24-hour basis, spanning from one zone to another across the major financial centers on the globe. |
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24 hours, 6 days per week
The FOREX Market never sleeps. A currency trader may take advantage of all profitable market conditions at any time. There is no waiting for an opening bell as in the case of trading stocks. It is a 24-hour, continuous currency exchange that never closes (normal hours of operation are Sunday 1pm through Friday 2pm Pacific standard time). This is very desirable for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon or night.
Liquidity
With $1.5 trillion changing hands daily, the FX market is also extremely liquid. This means that with a click of a mouse you can instantaneously buy and sell at will. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. You are never 'stuck' in a trade. You can even set the online trading platform to automatically close your position at your desired profit level (limit order), and/or close a trade if a trade is going against you (stop order). |
The FOREX market is the largest market in the world with nearly $2 trillion in transactions daily! In comparison, the New York Stock Exchange volume is approximately about $30 billion a day. Isn't it about time that you got involved?" |
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Leverage
FOREX investors are permitted to trade foreign currencies on a highly leveraged basis - up to 100 times their investment. For example, an investment of US $1,000 would permit a trade up to US $100,000 of any particular currency. A small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make extraordinary profits and at the same time keep risk capital to a minimum. |
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Profit potential in both rising and falling markets
Trading currency allows traders to earn profits during rising and falling markets. One can just as easily "short" a particular currency as go "long", because currencies trade in "pairs". Thus, when you buy a particular currency, you are actually simultaneously selling the other currency in that particular pair. As the market moves, one of the currencies will increase in value versus the other. Of course, it is up to you to choose the correct one to be long or short. |
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Low transaction cost
There are no brokerage commission fees for each FX transaction. The retail transaction cost (the bid/ask spread) is typically less than 0.1% (10 pips or points) under normal market conditions. For all the major currency pairs, the spread could be 4-5 pips. |
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Uncorrelated to the stock market
A trader in the Forex market is involved in selling or buying one currency against another. Thus, there is no correlation between the foreign currency market and the stock market. A bull market or a bear market for a currency is defined in terms of the outlook for its relative value against other currencies. If the outlook is positive, we have a bull market in which a trader profits by buying the currency against other currencies. Conversely, if the outlook is pessimistic, we have a bull market for other currencies and traders take profits by selling the currency against other currencies. In either case, there is always a good market trading opportunity for a trader. |
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Inter-bank market
The backbone of the Forex market consists of a global network of dealers. They are mainly major commercial banks that communicate and trade with one another and with their clients through electronic networks and telephones. There are no organized exchanges to serve as a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets. The Forex market operates in a manner similar to the way the NASDAQ market in the United States operates, thus it is also referred to as an over the counter (OTC) market. |
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No one can corner the market
The Forex market is so vast and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time. Even interventions by mighty central banks are becoming increasingly ineffectual and short lived. |
Advantages Of The Forex:
- Open 24 HoursNo commission feesHigh liquidity enables you to get in and out of the market easilyAble to make profits whether the market is up or down
- No one can corner the market
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Did you know that more and more business opportunity seekers worldwide are discovering the powerful profit potential of Foreign Exchange trading? In this business, there are no employees to hire, no advertising, no products to stock, and no organizations to build. It's just you, an Internet connection and a computer. That's all you need to make money on the world's largest market. If you are searching for an alternative to more traditional home-based business opportunities, then FOREX trading may be for you.
How much profit can actually be made? A well-trained currency trader can earn above-average profits of 2% to 20% or more in a single month, week, or even a day.
The FOREX market offers exciting profit potential in volatile times when other markets are unstable and insecure. Risk can be managed very advantageously to minimize the downside while still maximizing the upside potential. |
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Currency Pairs
An exchange rate is simply the ratio of one currency valued against another. The first currency is referred to as the "base currency" and the second as the counter or "quoted currency". For instance, the USD/JPY exchange rate specifies how many US Dollars are required to buy a Japanese Yen, or conversely, how many Japanese Yen are needed to purchase a US Dollar.
ISO Codes
All currencies are assigned an International Standards Organization (ISO) code abbreviation. In currency trading, these codes are often used to express which specific currencies make up a currency pair. For example, USD/JPY refers to two currencies: the US Dollar and the Japanese Yen.
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Most Actively Traded Currencies:
- EUR - (Euro)USD - (US Dollar)GBP - (Great British Pound)CHF - (Swiss Franc)JPY - (Japanese Yen)CAD - (Canadian Dollar)
- AUD - (Australian Dollar)
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Here are some of the most actively traded currency pairs in the FOREX market:
| Symbol |
Currency Pair |
Trading Terminology |
| EUR/USD |
Euro / US Dollar |
"Euro" |
| USD/JPY |
US Dollar / Japanese Yen |
"Dollar Yen" |
| GBP/USD |
British Pound / US Dollar |
"Cable" |
| USD/CHF |
US Dollar / Swiss Franc |
"Swissy" |
| EUR/JPY |
Euro / Japanese Yen |
"Euro Yen" |
| EUR/GBP |
Euro / British Pound |
"Euro Sterling" |
| USD/CAD |
US Dollar / Canadian Dollar |
"Dollar Canada" |
| AUD/USD |
Australian Dollar / US Dollar |
"Aussie Dollar" |
| GBP/JPY |
British Pound / Japanese Yen |
"Sterling Yen" |
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With the unprecedented technological advancement and global political pressures in the second half of the 20th century came a change into how people invested there money. Where before the global capital system was a domain of government, running mainly on transfer payments, private institutions and individuals have slowly increased their participation in this market as globalization and trade become the rallying points in global development.
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The Global Capital System
Initially the Global Capital System was an extension of the US financial framework, this mainly owing to its dominance of the world economy right after World War II. Capital flows came in the form of credits and grants under the Marshall Plan to rebuild the economies of Western Europe. Yet political pressures, economic development and regulatory practices of the period eventually lead to the development of the private sector giants, businesses and individuals that have slowly displaced the lead role of governments in the international financial markets. |
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The main difference between the international financial markets and a closed economy is the introduction of currency as an asset class by itself. Where in the latter your average portfolio manager has a choice between bonds, commodities, and equities as an investment venue now currencies of themselves do not merely facilitate a transaction but become a speculative instrument where profit is made from the fluctuation of exchange rates.
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Figure 1. International Financial Market
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Equities: Equities or Stock Markets are the most widely followed financial markets. Essentially they exists as an intermediary for raising capital with investors buying shares of stock of a company in anticipation of a stocks price appreciation or dividends in the form of stock or cash. Today equity transactions are becoming transborder in nature accounting for a significant portion in international fund flows and consequently movement in currency prices.
Bond Markets: The bond market is a venue for inexpensive borrowing by corporations and governments promising periodic payments over a specified time frame. Next to cash they are considered among the most liquid instruments given the high degree of convertibility and minimum risk. It is where interest rates are generally determined by open market forces.
Commodities: In the context of the International Financial System, commodity here mostly refers to precious metals such as gold, which serves as a primary course of refuge in times of instability and inflation. Spot Gold is typically traded in open market prices among the principal bullion markets London, New York, Hong Kong and Singapore though futures contracts of such have been developed among other commodity exchanges.
Currencies: Among these asset classes currencies stand out as they do not merely serve as a store of value but facilitate transactions in the other classes when there is a flow of fund from one economy to another. This in effect makes the currency markets the biggest of the classes as global integration and investment diversification proceed requiring the need of changing one currency for another.
In its entirety the International Financial system revolves around the interlinkages between the different asset classes and the prevailing interest rates. This relationship is usually characterized by how the different markets normally react to changes in one asset class, prevailing rates of interest or from an external stimulus such as the state of an economy. While no direct relationship is quantifiable from such inter-market linkage some correlations from these have been observed though it should be noted that these remain to be loosely interrelated as intervening factors persist.
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| Stimulus |
Inference |
Currencies |
Equities |
| GDP rises |
growing economy |
up |
up |
| GDP falls |
growing economy |
down |
down |
| Rising Inflation |
positive pressure on interest rates |
up |
down |
| Rising Consumption |
growing economy |
up |
up |
| Rising Unemployment |
slowing economy |
down |
down |
| Budget Surplus |
negative pressure on interest rates |
down |
up |
| Stimulus |
Inference |
Currencies |
Equities |
| Budget Deficit |
positive pressure on interest rates |
up |
down |
| Current Account Surplus |
demand for domestic assets is high |
up |
up |
| Current Account Deficit |
demand for foreign assets is high |
down |
down |
| Domestic Instability |
confidence in domestic economy is down |
down |
down |
| Easing Monetary Policy |
negative pressure on interest rates |
down |
up |
| Tightening Monetary Policy |
positive pressure on interest rates |
up |
down |
| Higher Reserve Requirement |
tightening effect on domestic liquidity |
up |
down |
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