CURRENCY EXCHANGE

 

The foreign currency exchange market (known as forex 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 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 foreign exchange market is simply a market for money. Currency pairs, such as GBP/USD and USD/JPY are simply the value of one currency against another, in effect the exchange rate of the currencies. In the pairs above, the pairs represent the value of the Great British Pound against the Dollar (GBP/USD) and the US Dollar against the Japanese Yen (USD/JPY).

 

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. Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.

 

WHY TRADING FOREIGN CURRENCY EXCHANGE AT UNITED GLOBAL ASSET MANAGEMENT ?

 

UNITED GLOBAL ASSET MANAGEMENT continues to be the preferred brokerage of online foreign currency exchange trading for private investors worldwide with the experience more than 12 years in the online trading for foreign currency exchange market. UNITED GLOBAL ASSET MANAGEMENT helped pioneer private foreign currency exchange trading, and as industry polls show, we have risen to become one of the most popular currency exchange trading providers in the business.

 

•	24-hour trading on live streaming prices
•	Low trading spreads starting from 2 pips*)
•	Competitive Commission
•	Leverage up to 200 with relatives low margin rates
•	Meta Trader 4 trading platform
•	Fast and easy opening account procedure

 

TRADING CHARACTERISTIC

 

There is no unified or centrally cleared market for the majority of foreign currency exchange 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 currency 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.

 

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.

 

Most Traded Currencies (April 2007)
Rank	Currency	ISO Symbol	% daily share
1	United States dollar	USD ($)	86.3%
2	Euro	EUR (€)	37.0%
3	Japanese yen	JPY (¥)	17.0%
4	Pound sterling	GBP (£)	15.0%
5	Swiss franc	CHF (Fr)	6.8%
6	Australian dollar	AUD ($)	6.7%
7	Canadian dollar	CAD ($)	4.2%
8	Swedish krona	SEK (kr)	2.8%
9	Hong Kong dollar	HKD ($)	2.8%
10	Norwegian krone	NOK (kr)	2.2%
11	New Zealand dollar	NZD ($)	1.9%
12	Mexican peso	MXN ($)	1.3%
13	Singapore dollar	SGD ($)	1.2%
14	South Korean won	KRW (₩)	1.1%
15	Other Currencies		14.5%

FOREIGN CURRENTCY EXCHANGE MARKET TRADING TIMES

 

When one market closes, another one opens, allowing traders to trade the market 24 hours a day.

 

Time Zone	New York	Singapore	GMT
Tokyo	19:00 – 04:00	08:00 – 17:00	00:00 – 09:00
Singapore & Hong Kong	20:00 – 05:00	09:00 – 18:00	01:00 – 10:00
Frankurt	02:00 – 23:00	14:00 – 23:00	20:00 – 05:00
London	03:00 – 12:00	15:00 – 24:00	08:00 – 17:00
New York	08:00 – 17:00	20:30 – 05:30	13:00 – 22:00

 

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.

 

DETERMINE OF FOREIGN CURRENCY EXCHANGE RATES

 

The following theories explain the fluctuations in foreign currencies exchange rates in a floating exchange rate regime (In a fixed exchange rate regime, foreign currencies exchange 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 : 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 1•0s in face of soaring US current account deficit.
(c)	Asset market model : 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 foreign currencies exchange 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.

 

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.

 

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.

 

MARKET PSYCOLOGY

 

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 Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.
•	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.
•	"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". 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.

 

FOREIGN CURRENCY SYMBOLS

 

Currencies, like equities, have their own symbols that distinguish one from another. Since currencies are quoted in terms of the value of one against the value of another, a currency pair includes the "name" for both currencies, separated by a "/". The "name" is a three letter acronym. The first two letters are in most cases reserved for identification of the country. The last letter is the first letter of the unit of currency for that country. For example;

 

	USD	=	United States Dollar
	GBP	=	Great Britain Pound
	JPY	=	Japanese Yen
	CAD	=	Canadian Dollar
	CHF	=	Confederatio Helvetica (Latin for Swiss Confederation) Franc
	NZD	=	New Zealand Dollar
	AUD	=	Australian Dollar
	NOK	=	Norwegian Krona
	SEk	=	Swedish Krona

Since the European Euro has no specific country attached to it, it goes simply by the acronym EUR. By combining one currency, EUR, with another USD, you create a currency pair EUR/USD.

THE BASE AND COUNTER CURRENCY

 

One currency in a currency pair is always dominant. It is called the Base Currency. The base currency is identified as the first currency in a currency pair. It also is the currency that remains constant when determining a currency pair's price.

 

The Euro is the dominant base currency against all other global currencies. As a result, currency pairs against the EUR will be identified as EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD, etc. All have the EUR acronym as the first in the sequence.

 

The British Pound is next in the hierarchy of currency name domination. The major currency pairs versus the GBP would, therefore be identified as GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD. Apart from the EUR/GBP, expect to see GBP as the first currency in a currency pair.

 

The USD is the next dominant base currency. USD/CAD, USD/JPY, USD/CHF would be the normal currency pair convention for the major currencies. Since the EUR and the GBP are more dominant in terms of base currencies, the dollar is quoted as EUR/USD and GBP/USD.

 

Knowing the base currency is important as it determines the values of currencies (notional or real) exchanged when a foreign exchange deal is transacted. The Counter Currency is the second currency in a Currency Pair notation.

THE VALUE OF CURRENCIES

 

The base currency is ALWAYS equal to one of the currency's monetary unit of exchange (i.e., 1 Euro, 1 Pound, and 1 Dollar). When an investor buys 100,000 EUR/USD, he is said to be buying (or receiving) the EURO or the Base Currency and selling (or paying for) the USD or Counter Currency. The amount of the Base Currency he is buying is equal to 100,000 Euros. Note that this is true no matter the current exchange rate at the time. The base currency amount remains constant.

 

The Counter Currency equivalent amount that the investor is selling (or paying), on the other hand, will fluctuate with the exchange rate for the Currency Pair. It is equal to:

 

(Amount of Base Currency x Market Foreign Exchange Rate)

 

Since the Counter Currency is the part of the currency pair that fluctuates higher or lower, it determines the strength or weakness of both currencies in a currency pair. As one currency goes up, the other must go down.

 

Currencies trade in fractions of a full unit. The smallest fraction is called a "pip". Currencies trade in pips because exchanges of currencies for speculative reasons are generally for large amounts. This is because of the leverage that is available when trading Foreign Exchange. United Global provides a Maximum Trading Leverage Ratio of 100:1 for standard accounts. At that ratio, a 100,000 EUR position would require $1,000 of Margin at an exchange rate of 1.2000. This is calculated by taking the US$ equivalent of 100,000 EUR or US$120,000 and dividing by the 100:1 leverage ratio.

 

Margin Required = $120,000 / 100 = $1,200

 

To determine the value of a pip for the deal above the following calculation would be made:
Value in US$ = 1.20 x Par Amount of Base Currency = $120,000
Value in US$ + a pip = (1.20+.0001) x Par Amount of Base Currency = $120,000
The value of a pip in dollars is equal to $120,000 - $119,990 or $10.

 

When a currency pair goes from a low price to a higher price, the Base Currency is said to have strengthened or gotten stronger. The converse is true for the Counter Currency. That is, it has weakened or gotten weaker as the Base Currency has gotten stronger. Since Exchange Rates represent what a fixed amount of currency is equal to in terms of another currency, we have seen there is just one price for the Currency Pair. The movement of that price determines whether a currency is getting stronger or weaker.

 

If the EUR/USD exchange rate goes from 1.2000 to 1.2024, we have concluded that the EUR got stronger, the USD weaker. Why? When looking at Foreign Exchange Rates (or prices) an action to Buy the Currency Pair implies buying the Base Currency, or EUR, and selling the Counter Currency, or USD. If the EUR/USD exchange rate moves higher, as expected, the trader can now sell the EUR/USD at a dearer/higher price. The difference represents a Profit to the trader that was Long, or who bought the EUR/USD Currency Pair.

 

Another way of looking at it is at 1.2000, an investor/trader could exchange 1 EUR for $1.20. At 1.2100, however, that same single EUR can now be exchanged for a higher amount of USD, in this case $1.21 USD. The EUR has strengthened or gotten stronger.