Alternate currency systems

The US received a number of advantages in being the world's reserve


currency, especially in the years following the breakdown of the Bretton


Woods system – the US cost of financing was much lower than that of other


countries, allowing it to run greater trade


and financial deficits than those possible for other


countries.

However, such a system encourages economies to run excessive deficits, leaving inflation as the


only escape. The current global currency system is unsustainable –


it has not been effective in dealing with the financial


crisis; the US has a large deficit


that it may need to inflate its way out of; and emerging economies have had the incentive to


continually undervalue their currencies against the USD to make their exports more attractive, now believing that they would


not succeed if they allowed their currencies


to appreciate naturally.

Then what is the alternative?

Restoring the gold standard is impractical – a pure gold standard tends to


be deflationary, while a not-so-pure gold standard based on derivatives could


be manipulated like the current currency system.

A global currency is another possibility, and was suggested by John Maynard Keynes. However, current problems


with the eurozone highlight how unrealistic it is to have a single


currency representing relatively independent economies, with widely varying


industries and political systems To be successful, a common


currency would require a loss of sovereign power to a certain degree, with one


agency overseeing trade policy, including limiting surpluses and monetary


policy to avoid inflationary temptations.

Another alternative was suggested in early 2011 when the IMF issued a report on Special Drawing Rights (SDR) as a replacement


for the USD as the world’s reserve currency.







In 1969, SDR's were created as a more limited


global currency. They can be converted into a required currency at exchange


rates based on a weighted-basket of currencies.


When the IMF issues funds to economies, they are typically dominated in SDRs, the largest such issue being the


equivalent of USD250 billion in April 2009 in response to the private-lending


collapse in the financial crisis.

It is argued that they would be a less volatile alternative to the dollar,


despite not being a tangible currency.







Increasing the global role of SDRs and issuing more SDRs would reduce the


current problem of recessionary bias – during and after financial crises, the


burden of adjusting to payments imbalances falls on nations running large


deficits, the US in particular – by allowing central banks to


exchange the SDRs for hard currency, rather than exchanging dollars.


This would also reduce the need for countries to accumulate reserves,


facilitating a reduction in the global imbalances that result from countries


stockpiling USDs. And, the smaller scale of SDRs would help


sustain the recovery of the global economy without leading to inflation. That


being said, the final point is dependent on the IMF members limiting the


introduction of SDRs into the market over the next few years.







If you have an opinion on the future direction of the USD, or which


currencies will perform well in the global economy, why not try forex trading? Trading is available on a range of


currencies, the most common currency pairs being the EUR/USD, GBP/USD, JPY/USD,


USD/CHF and AUD/USD.









Remember that CFDs and forex trading are leveraged products and can lead to losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

Spreads and forex trading

Currency exchange is


often advertised as being


a commission-free market, with no exchange charges, regulatory


charges or data charges.

 However, currency


exchange providers do need to


earn money somewhere, and this is


generally done through ask/buy spreads.

 The


ask/buy spread is how a currency pair is quoted; the ask


price is the price at which traders can sell the pair, while the


buy price is the price at which traders can buy the pair. If


the EUR/USD pair was quoted at 1.4441 / 1.444, traders could sell


the pair at 1.4441 and buy it at 1.4444. This is a


range of 3 pips, or 3 units of 0.0001.

 There are 3


ways in which most currency exchange


providers earn money on spreads, through


offering fixed spreads, variable spreads or a commission based on a percentage of the spread.

 In the case of the


EUR / USD forex pair, if you were trading through a currency


exchange provider that offered a fixed


spread, the quoted spread would always be 3 pips, regardless


of market liquidity.

 Currency


exchange providers that offer variable spreads


could have spreads as little as one pip, or as big


as 5. These spreads are typically


based on the liquidity of a currency pair; if


the pair is awfully liquid, the spread is


generally narrower, and if the pair is not, the spread


is generally broader. The most


commonly traded currency pairs , for example


the USD/JPY, USD/CHF, GBP/USD, AUD/USD and EUR / USD, are more liquid and have lower spreads.


By contrast, exotic currency pairs , for example the USD/ZAR, are traded less


frequently so are less liquid and sometimes have


higher spreads.







Variable spreads could also alter


at different times of the trading day or different times of


the week when the volume of fx trades is higher or lower.







Other currency


exchange providers may charge a small commission


, for example two-tenths of a pip (or 0.00002), and then pass


your order onto an enormous market maker with whom it has a relationship. Such an arrangement could end in you receiving tight spreads that only


huge traders could receive otherwise.

So which is best?

Fixed spreads may protect traders from slippage,


which is when your trade is executed at a different price to the one you were


offered, due to underlying market liquidity. You may also


always know what price you may pay for a currency pair.


But in the long run this


frequently works out to be costlier


than variable spreads.

 In the case of forex providers that charge


commissions, it is worth finding out what else


the provider is offering. If you are charged a 0.00002 commission on


your trade, but are offered a software platform that is better than most online providers, it could be worth paying the additional cost.

 Variable spreads are


attractive because they should mirror the underlying


market ; however, the


effectiveness of this depends on


how well providers can make the market.

 As currency


exchange is an OTC market, banks, the first market makers, have


relations with other banks and online currency


exchange providers, and these


relations are based mostly on the capitalisation and


credit standing of each


establishment. Foreign exchange providers that


offer variable spreads will be able to pass on more


competitive spreads to its clients if they are


well-capitalised and have a good relationship with a


bunch of credible banks.     









Remember that CFDs and forex trading are leveraged products and can result in losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

Why has the volume of fores trading gone up?

In 2010, a triennial report released by the Bank of


International Settlements said that the daily volume of foreign exchange trading was USD4.1 trillion. This was a


28% growth rate since 2007.

More recently, CLS


Bank released figures saying that the daily volume of


foreign exchange trading reached USD5.12 trillion in June


2011, breaking a previous record set in March 2010. This turnover was


Twenty p.c. higher than the same time last year.

 So why has there been


a rise in foreign exchange trading?

 The 28% increase


between 2007 and 2010 was partially credited to the


world financial crisis: as stock exchanges fell in 2008, the forex market became more popular . As currencies are


always traded in pairs, one will always be moving against another,


giving the opportunity for traders to


profit at any point, financial crisis or not.

 As for the 2011


increase, this has been attributed to the Greek crisis, as the near default increased trading on the unsteady euro.


And, although the austerity vote was passed, talks about a 2nd bailout program are still happening. Setting Greece apart, eurozone members


Portugal, Italy, Ireland and Spain also have high sovereign debt


proportions, with expectancies that Italy could be the


next to suffer following the spike in Italian bond yields on July 8, 2011.

 Another


reason for the record volume of foreign exchange


trades is the press conference held by Ben Bernanke on June 22,


2011, in which he conceded US weakness and announced


that the Fed had reduced the midpoint of


its 2011 GDP outlook growth range to 2.8% ( in


Jan it was 3.7% ), alongside enlarging its


end-2011 outlook unemployment and inflation rates. He


also announced that the 2nd round of


quantitative easing would expire at the end of the


month, and that was not likely to be followed by a 3rd round.

 Following the press


conference there was a swift fall in stock costs matched by


a rise in the USD.

 But the June rise in forex trading is not characteristic, as the


Northern Hemisphere's summer months are


sometimes a slow trading period. So it will be fascinating to see what Sep holds, as


this is historically the time when market


participants return from their summer


holidays. And it is also when the next tranche of aid will


be paid to Greece. This means that, even if the


currency market slows over the following


2 months, it is likely to come back with a


bang.    









Remember that CFDs and forex are leveraged products and can result in losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

Insure your portfolio using stock indices

Stock index CFDs


offer a handy way to hedge existing stock positions in


erratic markets; as CFDs can be traded long or


short traders are able to open a short position


on an index that is representative of their stock portfolio, knowing that any losses in


their stock portfolio will be balanced by their index CFD position.

 As an example, a


backer might hold a balanced stock portfolio across the


Australian market. He is anxious about


short term volatility and his assets


falling in value but doesn't want to


sell his positions as he expects the market to trend


up over the long term.

 As an alternative he comes to a


decision to offset possible losses by opening a short


position on the Australia 200 Index. As an index is a


probabilistic measure of the value of a


bunch of stock, it will rise and fall with the


changing cost of individual shares.

 He sells, or goes short on, numerous Australia 200 contracts, realizing


that now his share position is hedged if the market fluctuates. For


every dollar he loses on his share portfolio, he will gain a dollar on his Australia 200 position.


Similarly, for every dollar he loses on his index position,


he'll gain a dollar on his share


portfolio.

 From here there are three possible


scenarios: the stock and index appreciate in


value, the stock and index decline in


value, or the stock and index trade sideways.

 One. The stock and index go up in value




 The market continues trending upwards, and his


portfolio is soon worth another 10,000.


However, as the investor  had sold the Australia 200 with the hope that it would go down, he has made


a loss of the same quantity on that position. If he


suspects the market will continue to go up,


he could close his Australia 200 position and continue


enjoying to profits of his share


portfolio. If he still thinks there are unstable times


ahead, he could keep that position open, realizing that


any possible losses will be counterbalanced


by his share portfolio.

 Two. The stock and index fall in


value







If the investor  loses 20,000 across his


portfolio, he will make the same profit on his


Australia 200 index CFD position, which would annul


those losses. Once he believes the price has bottom out, he could close


the index position, taking those profits and holding onto the stock


until its price raises again.

 Three. The stock and index remain flat







The trader won't


have made a profit or loss on either trade.

 Index CFDs are a helpful tool


for safeguarding existing investments against price


fluctuations, and CFDs generally are a neat method to quickly diversify your portfolio with minimum


capital needs. That being said, this strategy is a


market-neutral strategy, meaning that although you will


not make a loss, you will not make a profit either


for as long as both positions are open. Hedging can lower


profit potential, but as it also


limits losses, it can reward traders with a steadier flow


of profit over time.    









Remember that CFDs and forex are leveraged products and can result in losses that exceed your first deposit. CFD trading may not be appropriate for everybody, so please make sure you understand the risks concerned.     

Improve your forex trading with panic selling

Panic selling is the


wide-scale selling of a currency pair


springing from trader fear.







 This


regularly takes place when an event


occurs , forcing forex traders to


re-evaluate the forex pair's worth ,eg a negative company statement or an


economic crisis. Regularly when the event behind the panic-selling was a predicted event


rather than an actual event ( i.e. : talk about an


investigation, rumours of poor company figures, or


an analyst opinion), panic-selling can


spring from short-term traders pushing


prices down to trigger the stop losses of weaker traders. This


creates wonderful opportunities for


traders to open positions when the price has hit rock bottom,


ready for it to rise again.

 When panic-selling, most forex traders just wish to escape from the trade


regardless of the price at which they sell.

 The


process of panic-selling

 One. An event


occurs to cause an currency pair price to speedily


drop.

 Two. A day


occurs when there's a significant


volume of selling and purchasing, as


buyers and sellers attempt to take control of the trend:


purchasers try to push the price up,


and sellers try to keep it droping. Usually


the price fall plateaus on this day.

 Three. If no


significant trend change occurs in step Two,


the currencypair price continues trending the same way,


though  at


a lower volume.

 Four. Steps


Two and Three repeat themselves until there's a


high-volume day which results in a long or short-term trend reversal.

 Five. The process


continues until a long-term trend is established.

 How to profit from panic-selling?

FX traders can profit


from panic-selling by selling currency pairs at the start of a sell-off, and purchasing


them back when the price bottoms-out, or by waiting for the price to


hit rock bottom, purchasing the pair at the low


price and selling them later once the price


is trending up again.

 The exhausted selling


model ( ESM ) uses trendlines, volume, moving averages and chart patterns to


figure out when a price has hit rock


bottom. The rules of the ESM are:

• The forex pair price must first
  
  
  speedily decline on high volume
• A volume spike will occur,
  
  
  making a new low, and seem to reverse the trend
• A higher low wave must occur
• A break of the downward trendline must
  
  
  occur ( i.e. : the price must break the trendline resistance )
• The Forty and / or Fifty day moving
  
  
  averages must be damaged
• The Forty and / or Fifty day moving
  
  
  averages must be retested and must hold

What about panic-buying?

 In


theory, panic-buying would be the exact


opposite of


panic-selling: the wide-scale purchasing of a


forex pairspringing from investor


trepidation,


with most traders just wanting to


go into the trade, not caring about the price at which they buy.

 Nevertheless it's much


more difficult to identify panic


buying than panic selling, as it is generally


assumed that traders buy based on risk and return assessment, and set stop losses and profit


boundaries when they open a trade.

 This is not


necessarily right: panic


buying happens when traders fear losing out


on the profits that everybody else is


making, and this fear hinders them from


evaluating and opening a trade based on their trading method. One example would be the


panic buying in the silver market from Jan 28 to


Apr 25 2011: buyers drove costs from


USD26.40 per oz to USD49.80 per oz, a gain of almost


90%.

 Then, in the first


week of May, over 1/2 those gains


evaporated in just 4 trading sessions. The


existence of panic buying means that traders can profit on it as


well as on panic selling if we use an exhausted buying model (


the complete opposite of the ESM ), it might make it clear


that :

• The forex pair price must first
  
  
  rapidly spike on high volume
• A volume spike will happen,
  
  
  creating a new high, and appear to reverse the trend
• A lower high wave must happen
• A break of the upward trendline must
  
  
  happen
• The 40 and / or 50 day moving
  
  
  averages must be broken
• The 40 and / or 50 day moving
  
  
  averages must be retested and must hold

To


sum up

 Panic selling ( and


panic buying ) creates great trading


chances for traders who are educated and alert.


The technical indicators in the ESM offer an


effective method for building


the best entry point for going long ( or going short, in the case of panic


buying ), and the incontrovertible fact that the model uses 1 or


2 technical indicators can protect traders from


costly mistakes.     



Remember that CFDs and forex are leveraged products and can result in losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

A beginner's guide to market bubbles

A bubble is when an asset, economy or market has a huge price spike, exceeding what is


considered to be its fundamental value by a


huge margin. Bubbles are sometimes identified retrospectively, often after


there was a crash of the cost of


the economy, market or asset in query.







The damage caused


by the burst of the bubble is dependent upon


the economic sector or sectors concerned: the


bursting of the US housing bubble in 2008 caused a world


financial crisis, because most banks and fiscal


establishments in America and Europe held many billions


of dollars worth of subprime mortgage-backed securities.

The 5 steps of a bubble

 Economic guru Hyman P Minsky identified 5 stages in a


credit cycle: displacement, boom, euphoria, profit taking and panic and this


general pattern is fairly consistent across bubbles in


varied sectors.

Stage 1 Displacement

 Displacement


happens when investors become


enthused


with something new: state-of-the-art technology in the


dot-com bubble, tulips in tulip mania ( a bubble in the 17th century where the


popularity of tulips climbed so


swiftly that tulips started selling for over ten times


the yearly salary of talented


craftsmen. Within months of the bubble bursting, tulips were selling


for One / Hundredth of their top prices ), or traditionally


low interest rates, as in the USA in June 2003, which started the


increase to the 2008 housing bubble.

Stage Two Boom

 Following a


displacement, prices start


climbing slowly. They gain momentum as more


traders enter the market, causing the


asset to draw in far-reaching coverage, then panic buying, which forces prices to record highs.

Stage Three Euphoria

 Prices


skyrocket: in the 1989 real-estate bubble in Japan, land


in Tokyo sold for up to USD139,000 per square foot. At


the peak of the web bubble in March Two


thousand, the mixed value of the technology stocks on the Naz was larger


than the GDP of most states.

 During the euphoric


phase, new valuation measures are promoted to justify the


spike in prices.

Stage Four Profit taking

 By this time,


talented traders start selling their positions and taking profits


sensing the bubble is going to burst. Nevertheless


determining the moment of collapse can be complicated and, if you miss it, you've most probably missed your opportunity to take


profits for good.

Stage Five Panic

 At that point, prices fall as speedily as


they originally rose. Traders faced with margin calls and the falling values of


their assets start panic selling: running from their


investments at any price. Supply soon overwhelms demand, and


prices plunge.

 In the 1989 Japanese


real estate bubble, real estate


lost nearly Eighty percent of its inflated


value, while stock prices fell by Seventy pc. Similarly, in October 2008, following the


collapse of Lehman Brothers, and the almost-collapse of


Fannie Mae, Freddie Mac and AIG, the SP 500 plunged nearly


17% in that month. That month, world equity markets lost


USD9.3 trillion, or 22% for their mixed market capitalisation.

Conclusion

 Being familiar with the stages of a bubble, whether it's in


the stock, forex, commodities or bonds


market, may help you identify


the subsequent one, and getting out before your profits


vanish.      









Remember that CFDs and forex are geared products and may lead to losses that surpass your first deposit. CFD trading might not be suitable for everyone, so please make sure you understand the risks involved.     

Forex Trading: Trading the AUD

According to the


International Monetary Fund, in 2010 Australia ranked thirteenth


internationally in terms of GDP, 20th


for the value of its exports, and fiftieth for the size of its


population.

Yet, in


spite of only having 0.33% of the planet's


population, the Australian dollar is among the 5 most


frequently traded currencies in the foreign exchange


market. The popularity of the Australian dollar among


foreign exchange traders is due to


geography, the land, and government


policy.

Geography



 Australia is the most


approvingly situated Western country re south-east Asia. Higher populations and growing economies have


led to an insatiable demand for


resources, and Australia's resources are the most accessible. India and China have potent


impacts on Australia's trade and business performance,


along with the value of the Australian dollar in


the foreign exchange market, with the Asian


countries importing Australian commodities and Australia importing


Indian and Chinese machinery and consumer


products.

The


land

 Australia has an


enormous range of coveted natural resources such as gold, diamonds, oil, uranium, nickel, iron ore, agricultural


goods and coal.

Government policy

 Australian government


policy has led to a stable central authority and


economy, and a lack of intervention in the foreign


exchange market, along with a Western approach to


business and regulation that has not always been


typical of the Asia-Pacific area.

 The Reserve Bank of


Australia ( RBA ) is quite conservative and does not


intermediate frequently in the foreign


exchange market. And, due to inflationary concerns, the RBA has


maintained Australia's interest rates as some of the highest in the developed


world. In foreign exchange, high


interest rates make the Australian dollar a


popular currency with traders who use the carry trade,


sometimes pairing it with a low-yielding currency like


the JPY.

 Factors that impact the Australian


dollar

 Along with


the economic and political variables that impact


foreign exchange rates, some elements are totally unique to the Australian dollar.

 Economically,


Australia stands out due to its heavy dependence on


commodities, with mining representing over Five pc of its GDP


and agriculture representing 12%. Although this


dependence led to Australia weathering the


global financial crisis better than many western economies, Australia


has never developed a robust manufacturing


sector; leading to a great amount of foreign debt,


a large current account deficit


and high interest rates.

 As Australia's


economy is driven by commodities; reports on weather, crop planting,


crops, metal costs and mine output; all


impact the Australian dollar, therefore are valuable


to fx traders trading on


the Australian dollar.

 This


dependency also makes the Australian dollar exposed to changes in the Asian markets,


especially India and China, with export


demands pushing the Australian dollar higher, only to fall when the demand


fades.

 Higher commodity


costs often create inflationary pressures in


developed countries, leading to the Australian economy


looking healthier for foreign


exchange traders when resource costs raise concerns


about the sustainability of expansion in

Japan, North America and Europe. This also makes the


Australian dollar a preferred


alternative for traders needing to go long on commodity


exposure and / or Asian resource demand.

The Australian dollar and fx

 Most major developed


currencies trend up and back down together, partly


due to trade links between them. The Australian


dollar, by contrast, enjoys some


autonomy from other important currencies: its health is


closer linked to commodity costs and commodity price volatility


is mirrored in AUD


volatility.

 This means the


AUD is likely to


continue to trade based on commodity costs, and it


is not likely to lose its


importance in the forex market, even


as the Chinese yuan becomes more important.









Remember that CFDs and forex are leveraged products and can lead to losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

HVAC Manual J Load Calculation – Green in Your Wallet, Green on the Earth

The Air Conditioning Contractors


of America (ACCA) is the nation's largest organization of


heating, ventilation, and air conditioning (HVAC) contractors. As such, they


have compiled several different manuals to set an industry standard


for how certain processes are run. Manual J, for


example, sets criteria for load analysis and how


much power should be dedicated to an HVAC system in order to heat


or cool a specific home. While this is a great way to standardize


the HVAC industry, there are other benefits


as well. Using an ACCA certified Residential Manual J8 load calculation software can also save energy and even


help the environment.













Back in 1986, Bill Wright and the


ACCA partnere to develop the world's first HVAC Manual J load analysis


residential software. This software made load calculations according


to Manual J guidelines much more user friendly and more accurate.


The development of this software made it possible for contractors to not only calculate a load more rapidly, but also to


make the most efficient use of the space in a home, and to design


the most efficient possible comfort system for that home. This was a


huge leap forward in the heating and cooling industry because it


prevented the waste of time, material, and energy in the conditioning of a home.




In conserving the amount of


energy it would henceforth take to heat and cool a home, this HVAC Manual J


load calculation software continues to help the industry to


stop from wasting materials, and to stop homeowners from wasting energy.


This not only saves them from spending money on wasted materials, but


also on wasted energy. The utility savings alone could add up to a


significant amount of money for the homeowner, but it also helps the homeowner


to save money in other ways that they might not even have considered


when they first asked for a Manual J8load calculation.













By installing an HVAC system that


has been designed with HVAC Manual J load calculation software, the homeowner


may qualify for certain rebates and tax credits under green initiatives


and programs such as EnergyStar, Built Green, and Leadership in Energy and


Environmental Design (LEED). So the savings that a homeowner could potentially


have by purchasing a system designed with this kind of load


calculation software could be quite significant. No wonder it's


quickly becoming more and more prevalent in the HVAC industry. It's


good for the green in your wallet, but it's also good for the green on the


Earth.









Savoy Engineering Group offers ACCA Certified Manual J8 Load Calculations, Manual S HVAC equipment selection & Manual D Duct Design services performed by Masters level engineer using ACCA Certified WrightSoft Universal software based on Manual J8. Savoy Engineering Group has been providing Manual J, S & D service for 6 yrs & has completed 3,500+ projects. We are Fast, Accurate& Affordable!

Is it better to have Pegged or Floating Forex Rates?

Open economies in a world market are confronted with three


objectives:

1.     


Stabilising the foreign


exchange rate

2.     


Benefitting fromglobal


capital mobility

3.     


Tailoring financial policy for


domestic needs

Unfortunately, although these goals may


be desirable, they are contradictory.


Fixed foreign exchange rates


stabilise the foreign exchange rate while engaging


in domestically-oriented financial policy. That being


said, fixed foreign exchange rates don't coincide with enjoying international capital


mobility, which is where floating exchange rates come


in.

Fixed foreign-exchange rates

A fixed


foreign-exchange rate is when a currency's


price is pegged to the value of another currency, group of


currencies, or another asset, like gold. Fixed foreign


exchange rates were used internationally from 1944


to 1973, but now fixed foreign exchange rates


are principally used by small


countries with economies that are essentially


dependent on foreign partners.

 Fixed


exchange rates are


intermittently evaluated for political


and commercial reasons, either being revaluated or


devaluated. A devaluation in a fixed exchange rate lowers


the value of the fixed currency, making exports more


enticing to foreign investors as they become cheaper when their value is converted into the investors'


currencies. This also discourages imports as imported goods


get more expensive due to the foreign exchange rate, the final


target being to increase trade surpluses while decreasing trade


deficits.

A revaluation raises


the value of the fixed currency, causing the opposite scenario to


happen.

Floating foreign-exchange rates

Floating forex rates are when a currency's price


changes dependent on factors in the foreign


exchange market , including the currency's


economy, financier sentiment, politics, inflation and rate derivatives.

This is the most


common regime for major economies with two


variants: free floating currencies and managed


floating currencies.

The value of free


floating currencies is solely determined by foreign


exchange market forces and can fluctuate


seriously, providing opportunities for traders to


profit on rising and falling currency values.

Managed floating


currencies are allowed to float to a certain


extent, and will be reined in by the central bank if


it travels too far away from ideal levels.

That being said, each floating exchange rate is managed, at least a bit. If a currency goes too far off course, that country's


central bank will reply by changing interest rates or by


purchasing and selling big quantities of currency to bring its currency back to


sufficient levels.

Pegged vs. Floating forex rates

Pegged


foreign exchange rates benefit from reduced risks in


world trade and investment as


world purchasers and sellers can


consent to an amount that won't be vulnerable


to forex rate changes. Pegged


foreign exchange rates can introduce tougher


economic management, keeping inflation under


control, and they can also reduce speculation, which can on


occasion be destabilising to less-established economies.

Nevertheless the


drawbacks of pegged foreign


exchange rates are that there's no automatic


balance of payments between nations without state


interference ; large holdings of forex reserves are


necessary to maintain the pegged rate ; the need to maintain the exchange rate can dominate


monetary policy, which may be better


targeted on other matters ; and


pegged foreign exchange rates can be unstable,


resulting in different rates of inflation causing imbalances between the levels of competition between


different nations.

Countries with


floating foreign exchange rates benefit from


permitting the market to quickly respond to


industrial events, in opposition


to waiting for the central bank's reaction. As the forex market is open 24-hours a day, free floating currencies can


react very quickly to significant


reports. This also results in automatic


correction in balance of payments adjustments as the exchange rates


adjust to balance supply and demand.

As this


will be taken care of


instantly, governments should have more time to


give policy to other issues.

As floating rates


change mechanically, they don't suffer


from international relations crises that will plague


nations with pegged forex


rates when pressure mounts on a currency to devalue or revalue.

And


nations with floating foreign exchange rates can


have lower forex reserves.

Nonetheless


floating foreign exchange rates result in


unsteadiness and uncertainty when talking about world trade, as fluctuations


may end up in changing prices for imports


and exports. This uncertainty can also lead straight to an absence of foreign investment. Having


said that, this risk can be hedged by trading with forward transactions.

Floating foreign exchange rates may lead to


unruly economic management as inflation isn't


punished, and governments may follow inflationary economic policies.

Nonetheless


the drawback of this is that severe shocks


may cause a currency to plunge, magnifying the economic


damage. And, as speculation is higher in floating exchange rate systems,


there's more uncertainty for forex traderes and investors. A floating exchange rate may also cause inflation by permitting import prices


to rise as the exchange rate falls.     









Improve your forex knowledge and learn to place a fx trade online. Remember that CFDs and forex are geared products and may lead to losses that surpass your initial deposit. CFD trading might not be suitable for everyone, so please make sure that you understand completely the risks.

Fx trading: Different Instruments

Spot fx Transactions

A spot foreign exchange


transaction is exchanging one currency for another at the


present exchange rate.

The currencies are exchanged at the spot rate at the


time of the contract, and the contract is mostly settled


within two working days, involves money


rather than a contract, and interest isn't included in


the transaction.

Forward/Future fx Transactions

Forward transactions are agreements to sell or buy a foreign currency at an agreed


upon price at a future date. The greatest difference between a


forward and a future is that a future is traded on exchanges, and


typically has a contract length of three


months.

Forwards are frequently


used to hedge foreign-exchange


risks, as by agreeing upon an exchange rate at the time of the contract,


you are protected from possible exchange rate fluctuations.


The party agreeing to buy the currency in the future takes on a long position,


while the party agreeing to sell the currency takes on a short position.

Swap fx Transactions

In a forex swap, two parties exchange


currencies for a definite length of time and consent to reverse the transaction by exchanging the same amount of currency later. Swaps permit you to use funds in one


currency to fund needs in another, without


shouldering a foreign-exchange


risk.

 A foreign exchange swap is usually


structured with a spot foreign exchange


transaction, then a forward foreign exchange


transaction.

Options Trading when fx trading

 A foreign exchange option is gives the owner the right


but not the obligation to either sell or buy a stated quantity of currency at a certain exchange


rate. This exchange rate is sometimes known as the strike price.


American options can be exercised on or prior to


the option expiry date, while European options can only be exercised on the


expiry date.

 If the owner


selects not to exercise the option, he will lose his deposit.

 Options are


frequently utilized to hedge against foreign-exchange risks, with corporations


often hedging certain foreign currency money flows


with forwards, and uncertain foreign money flows with


options.



Shall we say a Chinese manufacturer


has ordered some Australian materials for CNY3,000,000, in a contract where the


delivery and payment are both due in ninety days. The


prevailing exchange rate is 6.9456 yuan per dollar, so the CNY3,000,000 will equate to AUD431,928.13 when converted. If the yuan


rises to 7.1200 against the dollar over the


next month, the Australian company will lose potential


profits as it'll receive only receive AUS421,348.31 when the currency


is converted at the new rate. On the other hand, if the yuan declines to 6.8500,


the Australian company's profits will rise to AUD437,956.20.

 If the deal


and, subsequently, the CNY3,000,000, is sure, the Australian company could enter into a forward


contract to sell the parts for CNY3,000,000 in ninety days at the


prevailing exchange rate, shielding


both firms from the forex risk.

 If the deal


is uncertain, the Australian company might prefer to use


options. Using options rather than a forward will protect the Australian


company's profits (presuming the money is received), yield a


nice profit if the predicted money isn't


received but the forex rates move in its


favour, and cost at most an option premium (unlike forwards,


which can have unlimited losses).









Remember that CFDs and forex are geared products and may result in losses that surpass your initial deposit. CFD trading might not be suitable for everyone, so please make sure that you understand completely the risks involved.     

Is it better to have Pegged or Floating Forex Rates?

Open economies in a worldwide market are faced with three


aims:

1.     


Stabilizing the forex rate

2.     


Enjoying international


capital mobility

3.     


Using a monetary policy tailored


for domestic goals

Unfortunately, attractive as these


goals are, they're paradoxical.


Pegged forex rates


stabilize the forex rate while engaging


in domestically-oriented monetary policy. But, pegged rates don't coincide with enjoying world capital


mobility, which is where floating foreign exchange rates come


in.

Pegged forex rates

A pegged


foreign exchange rate is when a currency's


price is pegged to the value of another currency, group of


currencies, or another asset, like gold. Fixed exchange rates were used globally from 1944


to 1973, but now fixed exchange rates


are mainly employed by small


countries with economies that are essentially


dependent on foreign partners.

 Fixed


exchange rates are


infrequently evaluated for political


and business reasons, either being revaluated or


devaluated. A devaluation in a fixed exchange rate lowers


the value of the fixed currency, making exports more


attractive to foreign investors as they become cheaper when their value is converted into the investors'


currencies. This also discourages imports as imported goods


get more expensive due to the foreign exchange rate, the final


target being to increase trade surpluses while decreasing trade


deficits.

A revaluation raises


the value of the fixed currency, causing the opposite scenario to


happen.

Floating foreign-exchange rates

Floating forex rates are when a currency's price


changes dependent on factors in the currency market , such as the currency's


economy, financier sentiment, politics, inflation and interest


rate derivatives.

This is the most


common regime for major economies with two


alternatives: free floating currencies and managed


floating currencies.

The value of free


floating currencies is solely decided by currency market forces and can change


greatly, providing opportunities for traders to


profit on rising and falling currency values.

Managed floating


currencies are able to float to a certain amount, and will be reined in by the central bank if


it travels too far away from ideal levels.

That being said, each floating exchange rate is managed, at least a bit. If a currency goes too far off course, that country's


central bank will reply by changing IRs or by


buying and selling big


amounts of currency to bring its currency back to


acceptable levels.

Fixed versus. Floating foreign


exchange rates

Fixed


exchange rates benefit from reduced risks in


global trade and investment as


global buyers and sellers can


agree to a fee that won't be exposed


to foreign exchange rate changes. Fixed


exchange rates can introduce stricter


business management, keeping inflation in order, and they can also reduce speculation, which can often be destabilising to less-established economies.

However, the


disadvantages of fixed exchange rates are that there is no automated


balance of payments between countries without government


interference ; big holdings of foreign exchange reserves are


critical to maintain the fixed rate ; the


necessity to maintain the exchange rate can dominate


financial policy, that may be better


concentrated on other things ; and


fixed exchange rates can be unstable,


leading to different rates of inflation causing imbalances


of the levels of competitiveness between


different countries.

Countries with


floating exchange rates benefit from


allowing the market to quickly respond to


commercial events, as opposed


to waiting for the central bank's reaction. As the currency market is open 24-hours a day, free floating currencies can


react extremely fast to important


news. This also ends in automated


correction in balance of payments adjustments as the currency rates


adapt to balance demand and supply.

As this


can be looked after


automatically, governments should have more time to


commit policy to other matters.

As floating rates


change automatically, they do not suffer


from international relations crises that can plague


countries with fixed foreign exchange


rates when pressure mounts on a currency to devalue or revalue.

And


countries with floating exchange rates can


have lower foreign exchange reserves.

However,


floating exchange rates result in


instability and doubt when it comes down to global trade, as fluctuations


can lead to changing costs for imports


and exports. This doubt can also lead directly to a


dearth of foreign investment. Having mentioned that, this risk can be hedged by trading with forward transactions.

Floating foreign exchange rates may lead to


unruly economic management as inflation isn't


punished, and governments may follow inflationary economic policies.

Nonetheless


the drawback of this is that severe shocks


may cause a currency to plunge, magnifying the economic


damage. And, as speculation is higher in floating exchange rate systems,


there's more uncertainty for forex traderes and investors. A floating exchange rate may also cause inflation by permitting import prices


to rise as the exchange rate falls.     









Improve your forex knowledge and learn to place a fx trade online. Remember that CFDs and forex are geared products and may lead to losses that surpass your initial deposit. CFD trading might not be suitable for everyone, so please make sure that you understand completely the risks.

Improve your understanding of safe havens in the fx market

Explaining


a safe haven currency

A safe haven currency


is a currency that is considered to be safe during


geo-political and economic turmoil.


Consequently, when events like natural disasters,


war and stock exchange crashes occur, forex


traders invest in safe havens, causing the value of the safe haven currency to


rise and the value of currencies paired with it to fall, even though


the events may not have had an obvious impact


on the aforementioned currency.







What are the features of a safe haven currency?

Due


to the popularity of the carry trade, interest rate differentials


have often been connected with


safe-haven status. Nonetheless this trend isn't consistent across


the market, as it only looks to be an element when


trading the currencies of advanced states in opposition to emerging states.


This suggests that the liquidity of the currency being


traded is a driver of safe-haven status, as major currency pairs


have larger liquidity than exotic currency pairs.

Also, when


worldwide risk aversion is high, liquidity in some markets may


dry up, causing traders to take a position in very


liquid currencies. In turn, this gives the most liquid currencies an extra boost.

For a country to be


thought to be safe and low risk, it should be


isolated from worldwide events in case there's a crisis, and it should have good


fundamentals, like industrial management and


strong industry. In theory, the currencies of


such states might be seen as safe


haven currencies.

In practice, it is


more difficult to gain isolation in


an increasingly globalised world. So factors like the size of a


country's stock market, which indicates its


finance development and market size, now appear to outweigh the external


vulnerability associated with its net foreign


asset position.








What are the main


safe haven currencies?

The USD,


CHF and JPY are all called safe haven currencies. However, because


of the carry trade the fact that the Japanese Yen rises


during periods of global


chaos is likelier to be a reversal of


investors' carry trades ( which generally go long on a


currency with a high interest rate against currencies with low interest rates,


like the yen ) instead of a conscious


investment in the currency.

The CHF


is believed to be a safe-haven currency for a number


of reasons: first, the CHF is a particularly liquid currency and is paired with the USD.


Next, Switzerland has a highly competitive business


environment, along with low company tax, a


clear economy and a history of good


business management. Following,


Switzerland is historically neutral, so it is viewed as less


likely to be affected by political turmoil in


Europe than the euro. Fourth, the Swiss National Bank keeps a large


part of its reserves in gold, causing the


CHF to appreciate with the cost of gold.

Although the


CHF briefly dropped in value in the


global finance crisis due to its exposure


to the banking sector, it has since


regained its footing as a safe haven currency, and has


attracted investors as {several members of the eurozone|Greece,


Portugal, Italy and Ireland|several eurozone members|several


eurozone members (such as Greece, Italy, Ireland and Portugal |several members of the eurozone (such as


Greece, Italy, Ireland and Portugal struggle.




Why is the USD a safe haven


currency?

If we have a


look at the factors that contribute to a currency being a


safe haven, the US and the dollar don't measure up. The US is


not insulated from world events,


having major trading partners across North and Central America, Asia and


Europe. The US has not entirely recovered from the


finance crisis, with unemployment still around 10% and expansion having slowed again for the 3 quarters


to June 2011.

So why are


not currencies like the CAD and AUD (both of which are from nations that


didn't suffer from a banking crisis or a recession, and both of


which have robust economies and lower unemployment rates than the US)


thought to be safe haven currencies?

The Aussie


dollar, Canadian dollar and New Zealand dollar are all commodity


currencies, meaning that, as commodity exports contribute significantly to their GDP, they usually benefit


from strong commodity prices. Strong commodity prices are


inspired by a strong international economy,


meaning that when the world economy might be in peril, these currencies fall in value as investors turn to


safe havens.







So why is the US dollar considered to be a safe haven?

The most significant reasons for this are the size of the


US economy, including the


widespread utilisation of the US


dollar worldwide, the belief in the US dollar


as a safe-haven currency, and the liquidity of the US dollar.

The majority of fx trades involve the US dollar: the major currency pairs are all


paired with the US dollar, and formulas to work out


exchange rates between crosses ( currency pairs that don't contain the US


dollar ) use the US dollar exchange rate. As liquidity is how short-term currency traders make their profits, there are


continually numerous trades being made on the US dollar. In a risk


averse environment, we have already acknowledged that liquidity in some


markets dries up. This leads to more traders to invest in the most


liquid currencies, of which the USD is at the top


of the heap.

 As the USD has been said to be the world's top safe-haven


currency for years, there is a prevailing sentiment in the market


that the USD is safe, no matter what the present commercial


data might show. This is among the reasons


explaining why the USD strengthened in 2008


in spite of the financial


emergency: it was still seen to be more safe than


other markets.

The main


reason that the USD is considered to be a


safe haven currency is that the USD is "too big to fail".


Currently there are far more US dollars in circulation internationally than any other currency, with two thirds of


the remainder of the world's foreign reserves denominated in US


dollars. If the USD falls by too much, it will have


implications across world markets.


The dominance of the USD, and the dominance of the US in world


trade, means that other central banks won't permit the dollar to fail.     









Improve your knowledge of the currency markets and how to place a fx trade with education tools and free webinars.Remember: CFDs and forex are geared products and may result in losses that surpass your initial deposit. CFD trading might not be suitable for everyone, so please make sure that you understand completely the risks.

Beginner’s Guide To Fx

Fx, foreign exchange, forex and


currency exchange are all names for the market for trading


currencies.

On the currency


exchange, trading is used to speculate on


the strength of one currency against


another, so currencies are always traded in pairs if you


believe the first named currency will fall against the second one, you sell, if you


believe the first named currency will rise against the second, you buy.

As an example, if you believed the Australian dollar would


rise against the US dollar, you


would buy, or go 'long'. It is quoted at 1.6756 / 1.6759 and you buy one contract at 1.6759.







 For each unit of 0.0001


( or 'pip ) the Australian dollar rises against the US dollar, your profits increase, and for each 'pip' ( or 0.0001 unit ) the Australian


dollar falls contrary to the USD, your profits fall. In an AUD100,000 contract, you have got an exposure of USD10 for every pip


movement, figured out by multiplying the pip unit by


the value of the contract ( USD0.0001 x AUD100,000 = USD10 ). So if the


AUD goes up to 1.6759, you make USD30.

 When your account is open it will be altered daily to reflect the overnite


effect of the difference in rates between the Australian and


US dollars Together with a rate of


interest of your CFD broker for holding a long position.




 So a few days later AUD


/ USD is trading at 1.6877 / 1.6878 and you decide to


close your position, selling your contract and taking your profit. The biggest


difference between the closing position of 1.6844 and the opening position of


1.6859 is 0.0121, so yourreturn is USD1,210 ( USD0.0121 x AUD100,000


= USD1,210 ).

Why trade fx

• The forex market is the world's most traded market, with a daily
  
  
  trading volume of USD3.98 trillion as of April 2010, according to the
  
  
  Bank for International Settlements. This comprises USD1.49 trillion in spot transactions, USD475
  
  
  bn. in outright forwards, 1.765 trillion in foreign exchange swaps, USD43 bln in currency swaps
  
  
  and USD207 bn. in options and other products.
•  The liquidity of the
  
  
  currency markets, which means the bid-offer
  
  
  spreads are small contrasted to other asset
  
  
  groups, particularly in the case of major
  
  
  currency pairs , such as like the Australian, US and
  
  
  Canadian dollar, and the British pound, yen, euro and Swiss
  
  
  franc.
•  Due to
  
  
  the higher levels of liquidity, you
  
  
  can use high gearing having the ability to trade USD100,000 unit currency lots for as
  
  
  low as a 0.5% deposit, or USD 500.
•  Foreign
  
  
  exchange trading is commission free.
•  As the forex is a Twenty four hour
  
  
  market, trading positions that may be opened then shut at all hours, and internet trading means
  
  
  your orders are executed straight away.
•  It's possible
  
  
  to turn a profit at any time in time as currencies
  
  
  are traded in pairs, one will be moving versus the other.
• Though
  
  
  price movements can be
  
  
  volatile, they usually follow
  
  
  predictable patterns, which can sometimes be an advantage
  
  
  for traders who've got a clear system.

Remember that CFDs and forex are geared products and may result in losses that surpass your initial deposit. CFD trading might not be suitable for everyone, so please make sure you understand the risks concerned.     

The Reasons Why Most Financial Forex Traders Fail

Why


don’t more online fx traders succeed?

If you look for


information about successful fx


traders online, they typically say that upwards of Ninety percent of fx traders fail.


Though this might not be correct, the truth is that many of fx traders fail to


make a consistent profits from forex trading. Following


are the most significant reasons why they fail.

Expecting quick money

Many brokers across a


variety of markets publicise how


straightforward it is to start


trading, which causes new fx traders to think that trading


is asimple way to quickly make a considerable


amount of money. Yes, it is easy to trade with online trading platforms accessible from your smart phone handset, it's simple to open up and shut trades with a single click.

It is also not


difficult to make money everyone can


profit from a little luck and make a


successful fx trade without understanding how the


market functions. However, it is much more difficult make money regularly, and


it can be just as easy to lose money as it is to turn a


profit if you aren't equipped.

Not having a forex trading plan

Your trading plan


should cover both your goals, and what you'll do when


unexpected events occur.

What would you like to get out of trading? If it is something you


want to try once just to have a go, then go


ahead. But if you want to make


consistent profits in your trading then you have got to


have a plan that covers what you want to achieve,


whether or not that is an additional


$1,000 spending money in the bank a month, or a


nest egg for your children's


education. Knowing what you want to


earn from your trading also helps you plan what to put


aside , as well as what to reinvest.

Also, what will you


do when things go wrong? The market may turn against


you, or a power blackout could


prevent you from closing a fx trade. If you know how to


react to these things in advance then you will be less likely to


desperately bet away your capital attempting to quickly win your money back.

Not having a trading


method

If you don't


use a trading program then you will not know what works and what does not because you will be constantly changing your methods.


Being consistent is the best way to find out whether a trading


program works and, if it does, being consistent will


end in consistent profits.

Your trading


program should address your indicators for


entering, adding to and closing positions, the


percentage of your capital you are able


to risk, how to set orders for


when the market opens, and the tools you may use to


educate yourself about the market ( like charts, market


updates, business news, and so on ).

Once you have a system in effect keep notes of your


trades to monitor your success and change your


method.

Not handling trading risk

Most forex


traders just focus on possible profits, ignoring


possible risks . Even the best trading systems aren't right


100 pc of the time, meaning


that even the best forex traders will make losses.

So how much should


you risk? A common guideline is never risking


more than 2 percent of your capital per fx


trade. If you only risk 2 percent per trade, 5 straight


losses only equate to 10% of your capital gone,


and it is far easier to make back 10% of


your capital than it is to make back 50% or even


90%.

Other


favored forms of risk handling, made


easy with the advent of


online trading software, are stop and limit orders. Stop losses


order your fx trade to close if the market moves against you


to a certain amount. So if you have invested in


share CFDs and you place a stop loss at $0.50 below the share price when you


opened the trade, even if the shares lost $1 or $2 in


value your fx trade would be


automatically closed when the shares lost


$0.50, reducing your possible losses.

Trailing stops are


another kind of stop order, but they follow the market if it moves


in your favor. So if you set a $0.50 trailing stop on your


share CFDs, your opening stop would be $0.50 below the


value of the shares. If the shares went up by $1, your trailing stop


would also rise by that amount, staying $0.50 below the current share


price, so sealing in your profits in case the


price falls suddenly.

Limit orders work


like stop losses instead of reducing your


losses, they work to guard your profits. A stop loss closes an fx


trade when the market moves against you to a certain


extent. A limit closes a trade when the market moves in your


favor to a degree. So if you


invested in share CFDs that were worth $1.50, you could


place a limit order at $3. This would cause your trade to close


immediately when the shares rose to $3, meaning


that you would have taken your profits before a possible price


drop.

Not being disciplined

Of the reasons why forex traders fail, discipline is the most


important. Discipline is needed to make


regular trading profits. It takes discipline to


form a method, discipline to follow that


method, discipline to keep recent


with market movements, discipline to trade frequently, and


discipline to conserve your profits and to recover


from your losses.

Discipline is also


needed in circumstances where you shouldn't act


, such as pushing out your stop-losses when the market


turns against you, and then putting more money into a


poor fx trade in hopes that things


will turn around.

Unfortunately, the


human mind appears naturally inclined to break trading rules -


don't! If you have realistic expectations, put a trading plan and


method in effect manage your risk,


protect your profits and remain disciplined, you are on the


right path to being a successful trader.     



Remember that CFDs and forex are leveraged products and can result in losses that exceed your first deposit. CFD trading may not be appropriate for everybody, so please make sure you understand the risks concerned.     

Forex exit techniques

Many


instructional articles on forex trading debate when to trade currency


exchange, which currency pairs to choose and how much to trade, but few debate when to close


a trade. Closing a trade at the right point will both


maximise your profits and decrease your


risk.

Following are some


secrets for closing your trades :







Number 1 Currency


exchange closing strategy


– stop losses

A stop loss is when


you set an automated closing level on your currency


exchange trade in case the market moves against you,


and can be a brilliant way of handling your


risk if you are trading part time.

Let's imagine you went short on the EUR / USD at 1.4988 with a stop loss at 30


pips – this implies your stop is set at 1.5018, so if the


euro rises to that level against the US dollar, your trade


will be automatically closed, cutting your losses.

An advantage of


setting a stop loss is that you know how much


money you are risking as soon as you open a trade. When choosing the level


of your stop loss, be absolutely sure to leave enough room for market


fluctuations, as you would hate for your trade to close before the


market turned in your favor.

Number 2 Currency


exchange closing strategy


– trailing stops

Like stop-losses, a


trailing stop is also when you set an automated closing


level on your fx trade. But a trailing stop


automatically follows the market when it moves in your


favor.

If we continue with the previous example, you sold the EUR / USD at


1.4988 in the expectation that the price would go down and


you would make a profit on the difference in price. Instead of having a stop loss at 30 pips, you could set a


trailing stop at 30 pips. This would make your opening stop 1.5018,


and if the euro sank to 1.4856, your stop would drop to 1.4886. By


this stage, your stop is now below the opening cost of the trade,


implying even if the


cost of the euro rose and caused this stop, you


would still finish the trade with a decent profit.

Trailing stops allow


you to manage risk while enjoying unlimited profits.







Number 3 Currency


exchange closing


strategy – profit targets

You can


choose to exit a currency exchange


position when you reach a certain profit target. One of the advantages of this is that you can claim your profits as


fast as they are hit, instead of risking


missing a price fluctuation because your internet connection is slow.




The other advantage


of setting profit targets is that they can be set


automatically, taking the emotion out of trading.


This eliminates the chance of keeping a position


open to see how much more money you can make, and then


having the market turn.







Number 4 Forex exit technique


– break even targets

Like profit targets,


break even targets are targets to stop you from making a loss on your


original investment. This is typically


achieved using trailing stops, where a stop is moved to your entry price, or


slightly outside your entry price.

Number 5 Forex exit


technique – timed exits

A timed exit is


selecting when you would like a trade to shut


at the time of opening a position. This may be timed with


private restrictions ,eg


work or private commitments, or it might be timed with


industrial and political stories ,eg a budget or rate of interest


statement.

You may also


time your forex trades to shut


at the end of the US or European trading sessions.







Technique


specific exits

The exits


you opt to implement will rely upon


your system they could involve one or two of the


previously mentioned techniques, or


some private targets. This suggests that the


mixture of exit techniques is infinite,


so find a technique that will help you


reduce risk and save your profits, monitor its success, and


tweak it as you become a more seasoned trader.     










Remember that CFDs and forex are geared products and may result in losses that surpass your initial deposit. CFD trading might not be suitable for everyone, so please make sure that you understand completely the risks involved.     

The factors impactingforex

Of the factors that


may affect forex rates, the most


serious include economic factors,


commodity prices and the terms of trade, interest rate differentials,


political factors and capital flows.

The influence of economic


factors on foreign exchange







Economic


circumstances can have a significant impact on long-term foreign exchange rate movements, and


the most significant factors are relative inflation rates, and the


balance of payment trends.

 Relative inflation rates

The purchasing power


parity (PPP) exchange-rate calculation asserts that


international exchange rates should adjust to


equalise the price of a basket of products in a


common currency. So, a basket of products and


services in France ( including items


like food, property, utilities, entertainment, etc. ) should cost the same as a basket of the same services


and goods in the US, or Australia, or


Singapore, once the value of each basket has been converted to a common


currency.

 However, if one


nations inflation is higher than another, sooner or later that nations exports


will be more expensive than similar products in the second


country. If we say the 1st country is the US, and the


second is Singapore, this would make it


desirable for the US to import more from Singapore,


as Singapore's products will be less expensive.


Accordingly, as products manufactured in


the States are getting more


expensive due to inflation, the US will export less and will run a


rising trade deficit with Singapore.

This could only be corrected by a depreciation in


the foreign-exchange rate.

Therefore if


the price of a basket of products and


services in Singapore rose by 3%


over the passage of time and the price


of the same basket rose by 15% in the US, the US


dollar should depreciate by 10.4% to fix the relative


inflation rates: (115 – 103)/120 x 100 = 10.4%

That having


been said, there are a number of problems with


the PPP measurement :

• Different nations don't use the same
  
  
  baskets of products
• The range and quality of these products
  
  
  can change
• Trade barriers, like transport costs and trade
  
  
  restrictions, break the link between
  
  
  the prices of products in different nations
• Nations don't comply to a uniform
  
  
  price level though food prices may be higher
  
  
  in one country, that country might also have lower house prices
• At its most elementary, PPP doesn't take into account relative
  
  
  revenues, and also must be
  
  
  altered for GDP

And, so far as


it's affect on the foreign exchange market is


concerned, currency is traded for reasons aside


from the exchange of services and


goods. Nonetheless PPP foreign-exchange rates can be helpful when


official rates re manipulated by governments, as it


is likely the most pragmatic foundation for


commercial comparison when a country appears artificially


strong.

 Balance of payment trends

When foreign-exchange


rates were fixed (1944-1973), nations with persistent payment


deficits might devalue their currencies to encourage exports and


discourage imports.

In the


existing floating foreign exchange market,


the belief that currencies of countries in


debt with payment issues will deflate, while the


currencies of countries with trade surpluses will inflate,


has been carried forward.

The currencies of


countries with persistent trade deficiencies will


usually be pushed down as there are far more sellers of the


currency ( importers paying for goods in


foreign currencies ) than buyers of the currency ( exporters


who have to convert foreign invoices into local


currency ).








The impact of commodity


costs and the terms of trade

Commodity


costs can have a serious impact on


the foreign exchange rate movements of


commodity currencies (the currency of a land that relies heavily


on the exportation of commodities for


income), such as the AUD, CAD and NZD.

Quite


simply, when the demand for commodities goes up, so do their


costs, and so does the GDP of a major commodities exporter. So,


the value of the commodity producer’s currency also rises.







The terms of trade is a proportion comparing export


and import costs if a country's export costs rise


by a greater rate than its import costs, that


country's terms of trade have favorably improved. If a


country's terms of trade improve, the demand for exports


causes a rise in the currency's value.

The impact of interest rate


differentials on foreign exchange

Differentials in


interest rates are have one of the biggest impacts on


short term movements in foreign-exchange


rates. Higher interest rate currencies have a tendency to


appreciate against lower interest rate currencies, as


investment in securities carrying a higher


interest rate will result in greater returns


that investment in securities with a lower


interest rate. As it's important to buy the


pertinent currency before getting a


security, the demand for this currency pushes the foreign


exchange rate up.

However, this only works if


all other factors between the countries are


equal. If an economic


degradation is expected to


undermine a currency, the interest rate differentials would have


to be exceedingly giant to nullify


the acknowledged exchange rate risk.

This is why central banks may tighten financial policy to forestall downward pressure on currencies.







The


impact of politics on foreign exchange







Political factors may affect the foreign exchange rate in the


short term, as foreign investors withdraw money from a


country in periods of political doubt.


This means election campaigns can be turbulent times in


the foreign exchange market, as one party may be


campaigning for financially irresponsible policies, or policies that


are disagreeable to investors.

Government


interference into the market can also have an effect on foreign exchange rates.

The impact of capital flows on foreign


exchange

The flow of capital


into a country can have a major influence on a currency


rates, particularly if all the other factors are


relatively stable. When investor sentiment favors a


certain economy or industry, capital flows into that economy,


boosting the currency.







To


conclude







Although one can


explain forex rate movements in relation to the economy, politics, rates, etc., it is


simpler to evaluate this retrospectively than it is to prediction


currency exchange rates, as these


factors might be pointing in different directions. The forex trading of both


beginner and experienced traders can gain benefit from reading market analyses written by


forex brokers, who


might be more experienced at interpreting movements


presently taking place in the market.









Remember that CFDs and forex are geared products and may lead to losses that surpass your initial deposit. CFD trading might not be suitable for everyone, so please make sure that you understand completely the risks involved.