Euro May Cash in on its Anti-Dollar Role Before the ECB Decision
The dollar is near collapse; and its liquid counterparts stand to reap the benefits of the potential cross-currency winds. However, from a fundamental standpoint who stands to benefit the most? Those pairs that have pressed all the way to the edge of their recent historical highs against the ailing reserve currency (the British pound or Aussie dollar) are heavily dependent upon unpredictable risk appetite. The stalwart among the group is the euro. Liquidity, a steady yield, bullish growth forecasts and a policy authority that is confident financial conditions are sound make for an appealing alternative for the most actively traded currency in the market. However, is the outlook truly as bright as the market is pricing in? More importantly; do speculators even care?
In trying to approach the first question, it is important to remember that valuing a currency is always done on a relative basis. For example, the euro could still rise against one of its major counterparts even when the economy is sinking as long as the Euro Zone is contracting at a slower pace. That being said, the objective answer is that the economy is not as stable as the strength of the currency would suggest. We will not see the first round of the German and Euro Zone second quarter GDP figures until August 13th. Nonetheless, expectations will readily discount each indicator that crosses the wires until then. This past week’s data further exposed a significant discrepancy between expectations and actual data. Surveys for consumer, business and economic sentiment all reported improvements in their July readings (though they were mostly still below the net expansion/contraction line). In contrast, the German unemployment rate has held at its highest level since December of 2007. Consumers are the foundation for economic health and will determine whether the Euro Zone will struggle to recovery or truly return to growth. Retail sales, factory orders and industrial production will all factor in to this outlook.
Each of these indicators will feed into the market’s unobserved and dynamic growth forecasting model; but the true benchmarks for economic activity will come from the ECB. The central bank is scheduled to announce rates on Thursday and both the market and economists suspect the benchmark will be left unchanged at 1.00 percent. The real value from the event comes from the statement that accompanies the announcement and President Jean Claude Trichet’s forum with the press shortly after the official release. Political pressure has intensified from some of the region’s largest economies to reign in stimulus to avoid stoking inflation. What’s more, the RBA has set a precedence in suggesting it was taking a cautious, hawkish turn; and the ECB no longer carries the burden to be the first. These factors aside though, the economy is certainly not stable enough to take such a passive (much less hawkish) approach. There are still economies suffering severe recessions; and even those that are considered relatively strong are still contraction. Should the group remove the safety net too soon, they run the risk of exacerbating a pull back that develops later.
Another generally accepted truism that has worked in the euro’s favor is that the region has remained otherwise financial sound while the UK and US were nearing structural collapse. However, many of the biggest risks to the broader markets going forward come from the Euro Zone. A premature draining of financial aid threatens to choke the economy, regional banks have yet to write off their losses (they will) and Eastern Europe threatens to default on its loans to the EZ in masse. All of these are considerations to keep in mind. – JK
US Dollar Reversal and Breakout a Matter of Time – But When?
The US Dollar finished the week lower against foreign counterparts, but it failed to break below key range-lows despite sharp S&P rallies and fairly disappointing domestic economic developments. The highly-anticipated US Gross Domestic Product showed that the economy contracted less than expected in the second quarter of the year, but noteworthy downward revisions to earlier figures clearly dampened optimism on growth. Government data showed that the economy saw its worst quarter-on-quarter performance in 27 years in Q1. The slower rate of contraction in Q2 may have calmed some nerves, but truly dismal Personal Consumption figures underlined that consumers—the engine of earlier economic growth—remains heavily subdued. The upcoming week brings infamous Non Farm Payrolls data to the fore, and it will be critical to watch for any signs that the US Dollar could finally break its range versus major forex counterparts.
Week in and week out we have discussed potential scenarios for a US Dollar breakout, but FX markets have shown little willingness to push the USD beyond its trading channel through directionless summer trade. Of course, forex market volatility tends to be mean-reverting over the medium-to-long run. Lengthy periods of consolidation most often lead to sharp breakouts, but the timing of said shift remains anything but clear. Forex options markets volatility expectations are near their lowest levels since August, 2008. Anecdotal evidence tells us that trading volumes have fallen sharply through the summer—theoretically making it easier for a big traders to force volatility. Yet few have shown the appetite for moving markets, and we anxiously await signs that the US dollar may finally break out of its consolidative range.
Can the US Non Farm Payrolls report and other key data releases finally break us from our recent range? We will certainly know the answer to this question once the coming week is through, but it is worthwhile to discuss possible scenarios in which the US Dollar could finally move sustainably higher or lower against the Euro and other key counterparts. Consensus forecasts imply that markets expect broad improvements in key NFP and similarly market-moving ISM Manufacturing and Services results. Given the general uptrend in equity markets and general economic mood, such predictions come of little surprise. Yet lofty expectations leave significant room for disappointment, and the very fact that the S&P 500 has rallied so substantially through recent weeks leaves it at risk for a noteworthy correction.
Forex futures and options data shows that traders remain extremely net-short the US Dollar, and our bias remains bullish as a result. The key difficulty remains the timing of any such correction, as market sentiment can remain at extremes for extended stretches. In other words, we know it’s all a matter of time. Given enough of it, we may expect the Greenback to finally break above the Euro 1.4350 mark or below 1.3800. Given enough time, traders will unwind extremely one-sided US Dollar short positions and bring a noteworthy correction. Whether that may be in the week ahead is anyone’s guess, however, and it will be critical to watch for signs of a sustained reversal. Said signal could come from the S&P 500 and other key financial market risk barometers. - DR
The US Dollar finished the week lower against foreign counterparts, but it failed to break below key range-lows despite sharp S&P rallies and fairly disappointing domestic economic developments. The highly-anticipated US Gross Domestic Product showed that the economy contracted less than expected in the second quarter of the year, but noteworthy downward revisions to earlier figures clearly dampened optimism on growth. Government data showed that the economy saw its worst quarter-on-quarter performance in 27 years in Q1. The slower rate of contraction in Q2 may have calmed some nerves, but truly dismal Personal Consumption figures underlined that consumers—the engine of earlier economic growth—remains heavily subdued. The upcoming week brings infamous Non Farm Payrolls data to the fore, and it will be critical to watch for any signs that the US Dollar could finally break its range versus major forex counterparts.
Week in and week out we have discussed potential scenarios for a US Dollar breakout, but FX markets have shown little willingness to push the USD beyond its trading channel through directionless summer trade. Of course, forex market volatility tends to be mean-reverting over the medium-to-long run. Lengthy periods of consolidation most often lead to sharp breakouts, but the timing of said shift remains anything but clear. Forex options markets volatility expectations are near their lowest levels since August, 2008. Anecdotal evidence tells us that trading volumes have fallen sharply through the summer—theoretically making it easier for a big traders to force volatility. Yet few have shown the appetite for moving markets, and we anxiously await signs that the US dollar may finally break out of its consolidative range.
Can the US Non Farm Payrolls report and other key data releases finally break us from our recent range? We will certainly know the answer to this question once the coming week is through, but it is worthwhile to discuss possible scenarios in which the US Dollar could finally move sustainably higher or lower against the Euro and other key counterparts. Consensus forecasts imply that markets expect broad improvements in key NFP and similarly market-moving ISM Manufacturing and Services results. Given the general uptrend in equity markets and general economic mood, such predictions come of little surprise. Yet lofty expectations leave significant room for disappointment, and the very fact that the S&P 500 has rallied so substantially through recent weeks leaves it at risk for a noteworthy correction.
Forex futures and options data shows that traders remain extremely net-short the US Dollar, and our bias remains bullish as a result. The key difficulty remains the timing of any such correction, as market sentiment can remain at extremes for extended stretches. In other words, we know it’s all a matter of time. Given enough of it, we may expect the Greenback to finally break above the Euro 1.4350 mark or below 1.3800. Given enough time, traders will unwind extremely one-sided US Dollar short positions and bring a noteworthy correction. Whether that may be in the week ahead is anyone’s guess, however, and it will be critical to watch for signs of a sustained reversal. Said signal could come from the S&P 500 and other key financial market risk barometers. - DR
Life insurance industry hit by slowdown - min
NEW DELHI (Reuters) - Slowdown in the economy has trimmed growth in premium income of Indian insurers in FY09, a junior finance minister said in a written reply to Parliament on Friday.
Namo Narain Meena said the total premium income of market leader Life Insurance Corp grew 4.45 percent to 1.56 trillion rupees in FY09, lower than the 17.19 percent expansion seen in 2007/08.
The overall premium income of all the life insurers stood at 2.24 trillion rupees at the end of FY09, compared with 2.01 trillion rupees in the previous year.
"In the year 2008/09, the pace of growth in the insurance sector has slowed down which may be a result of the economic slowdown during the period," Meena said.
NEW DELHI (Reuters) - Slowdown in the economy has trimmed growth in premium income of Indian insurers in FY09, a junior finance minister said in a written reply to Parliament on Friday.
Namo Narain Meena said the total premium income of market leader Life Insurance Corp grew 4.45 percent to 1.56 trillion rupees in FY09, lower than the 17.19 percent expansion seen in 2007/08.
The overall premium income of all the life insurers stood at 2.24 trillion rupees at the end of FY09, compared with 2.01 trillion rupees in the previous year.
"In the year 2008/09, the pace of growth in the insurance sector has slowed down which may be a result of the economic slowdown during the period," Meena said.
Adani Power IPO oversubscribed
The initial public offer (IPO) of Adani Power Ltd, a subsidiary of Ahmedabad-based Adani Enterprises, has marked the return of the institutional investors' appetite for public offers. Foreign institutional investors (FIIs), banks, insurance companies and mutual funds have responded overwhelmingly to Adani Power's maiden issue, which closed on Friday.
The company seeks to raise about Rs 2,500 crore from the offer, for which the price band was fixed at Rs 90 to Rs 100 per share. "The over subscription of the Adani Power IPO shows that investor appetite is definitely back especially in the QIB space. Lanco had also launched a QIB of Rs 750 crore on Thursday and even though it is much smaller in size compared to Adani Power, the response has been very good," said Lalit Thakkar, director, Angel Broking.
The Adani Power issue received over 6.5 times subscription to its issue of over 24.87 crore shares, according the subscription figures available on the Bombay Stock Exchange (^BSESN : 15924.23 +253.92) website till 1800 hours. The response from retail investors to Adani Power IPO was lukewarm. Almost all the bids received were at the upper end of the price band, and a large part of it from long-term investors.
The initial public offer (IPO) of Adani Power Ltd, a subsidiary of Ahmedabad-based Adani Enterprises, has marked the return of the institutional investors' appetite for public offers. Foreign institutional investors (FIIs), banks, insurance companies and mutual funds have responded overwhelmingly to Adani Power's maiden issue, which closed on Friday.
The company seeks to raise about Rs 2,500 crore from the offer, for which the price band was fixed at Rs 90 to Rs 100 per share. "The over subscription of the Adani Power IPO shows that investor appetite is definitely back especially in the QIB space. Lanco had also launched a QIB of Rs 750 crore on Thursday and even though it is much smaller in size compared to Adani Power, the response has been very good," said Lalit Thakkar, director, Angel Broking.
The Adani Power issue received over 6.5 times subscription to its issue of over 24.87 crore shares, according the subscription figures available on the Bombay Stock Exchange (^BSESN : 15924.23 +253.92) website till 1800 hours. The response from retail investors to Adani Power IPO was lukewarm. Almost all the bids received were at the upper end of the price band, and a large part of it from long-term investors.
Rupee at near 2-mth high on strong equities, weak dollar<
MUMBAI (Reuters) - The rupee rose to its highest in nearly two months on Monday, extending gains into a third straight session, as a falling dollar encouraged buying in the local unit and buoyant equities raised hopes of capital inflows.
The partially convertible rupee ended at 47.635/645 per dollar, off an intraday peak of 47.63 -- its highest since June 12, and about 0.6 percent stronger than Friday's close of 47.93/95.
"The dollar's fall had a significant impact on the rupee's rise today. We would see the rupee in the 47.50-47.70 range tomorrow," a senior trader at a foreign bank said.
The dollar hit its lowest level in 2009 on Monday as solid banking earnings and a U.K. survey showing manufacturing activity unexpectedly expanding boosted the view that the global economy is over the worst.
Higher share prices also bolstered sentiment in favour of the local unit, traders said.
The main share index climbed 1.6 percent on Monday to its highest close in 14 months, led by energy giant Reliance Industries (RELIANCE.NS : 2017 +61.6). Traders said the market picked up steam after European markets rose to a new high this year on encouraging news from banks.
Foreign funds have bought almost $7.5 billion worth of shares this year, following net sales of more than $13 billion in 2008.
One-month offshore non-deliverable forward contracts were quoting at 47.64/74, little changed from the onshore spot rate.
(For more news on Reuters Money click http://in.reuters.com/money)
MUMBAI (Reuters) - The rupee rose to its highest in nearly two months on Monday, extending gains into a third straight session, as a falling dollar encouraged buying in the local unit and buoyant equities raised hopes of capital inflows.
The partially convertible rupee ended at 47.635/645 per dollar, off an intraday peak of 47.63 -- its highest since June 12, and about 0.6 percent stronger than Friday's close of 47.93/95.
"The dollar's fall had a significant impact on the rupee's rise today. We would see the rupee in the 47.50-47.70 range tomorrow," a senior trader at a foreign bank said.
The dollar hit its lowest level in 2009 on Monday as solid banking earnings and a U.K. survey showing manufacturing activity unexpectedly expanding boosted the view that the global economy is over the worst.
Higher share prices also bolstered sentiment in favour of the local unit, traders said.
The main share index climbed 1.6 percent on Monday to its highest close in 14 months, led by energy giant Reliance Industries (RELIANCE.NS : 2017 +61.6). Traders said the market picked up steam after European markets rose to a new high this year on encouraging news from banks.
Foreign funds have bought almost $7.5 billion worth of shares this year, following net sales of more than $13 billion in 2008.
One-month offshore non-deliverable forward contracts were quoting at 47.64/74, little changed from the onshore spot rate.
(For more news on Reuters Money click http://in.reuters.com/money)
Rupee at near 2-mth high on strong equities, weak dollar<
MUMBAI (Reuters) - The rupee rose to its highest in nearly two months on Monday, extending gains into a third straight session, as a falling dollar encouraged buying in the local unit and buoyant equities raised hopes of capital inflows.
The partially convertible rupee ended at 47.635/645 per dollar, off an intraday peak of 47.63 -- its highest since June 12, and about 0.6 percent stronger than Friday's close of 47.93/95.
"The dollar's fall had a significant impact on the rupee's rise today. We would see the rupee in the 47.50-47.70 range tomorrow," a senior trader at a foreign bank said.
The dollar hit its lowest level in 2009 on Monday as solid banking earnings and a U.K. survey showing manufacturing activity unexpectedly expanding boosted the view that the global economy is over the worst.
Higher share prices also bolstered sentiment in favour of the local unit, traders said.
The main share index climbed 1.6 percent on Monday to its highest close in 14 months, led by energy giant Reliance Industries (RELIANCE.NS : 2017 +61.6). Traders said the market picked up steam after European markets rose to a new high this year on encouraging news from banks.
Foreign funds have bought almost $7.5 billion worth of shares this year, following net sales of more than $13 billion in 2008.
One-month offshore non-deliverable forward contracts were quoting at 47.64/74, little changed from the onshore spot rate.
(For more news on Reuters Money click http://in.reuters.com/money)
MUMBAI (Reuters) - The rupee rose to its highest in nearly two months on Monday, extending gains into a third straight session, as a falling dollar encouraged buying in the local unit and buoyant equities raised hopes of capital inflows.
The partially convertible rupee ended at 47.635/645 per dollar, off an intraday peak of 47.63 -- its highest since June 12, and about 0.6 percent stronger than Friday's close of 47.93/95.
"The dollar's fall had a significant impact on the rupee's rise today. We would see the rupee in the 47.50-47.70 range tomorrow," a senior trader at a foreign bank said.
The dollar hit its lowest level in 2009 on Monday as solid banking earnings and a U.K. survey showing manufacturing activity unexpectedly expanding boosted the view that the global economy is over the worst.
Higher share prices also bolstered sentiment in favour of the local unit, traders said.
The main share index climbed 1.6 percent on Monday to its highest close in 14 months, led by energy giant Reliance Industries (RELIANCE.NS : 2017 +61.6). Traders said the market picked up steam after European markets rose to a new high this year on encouraging news from banks.
Foreign funds have bought almost $7.5 billion worth of shares this year, following net sales of more than $13 billion in 2008.
One-month offshore non-deliverable forward contracts were quoting at 47.64/74, little changed from the onshore spot rate.
(For more news on Reuters Money click http://in.reuters.com/money)
Forex reserves fall by $560 m
Mumbai: Forex reserves fell by $560 million to touch $263.917 billion for the week ended July 10, according to the latest figures from the Reserve Bank of India. The moderate fall in reserves is mainly on account of currency revaluation, said a forex dealer with a private bank.
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This is the second consecutive week that forex reserves have declined.
In the earlier week, the foreign exchange reserves had fallen by $107 million to $264.477 billion.
In the week under consideration, foreign currency assets fell by $559 to $252.873 billion. Foreign currency assets expressed in US dollar terms include the effect of appreciation or depreciation of non-US currencies such as Euro, Sterling and Yen held in reserves.
Gold and SDRs were unchanged at $9.8 billion and $1 million respectively.
The reserve position in the IMF fell by $1 million to $1.243 billion.
Next week, the rupee movement will depend on the domestic stock market, the dealer said. "The rupee could be under pressure because of month-end demand. It could fall to 48.85-49," the dealer said.
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This is the second consecutive week that forex reserves have declined.
In the earlier week, the foreign exchange reserves had fallen by $107 million to $264.477 billion.
In the week under consideration, foreign currency assets fell by $559 to $252.873 billion. Foreign currency assets expressed in US dollar terms include the effect of appreciation or depreciation of non-US currencies such as Euro, Sterling and Yen held in reserves.
Gold and SDRs were unchanged at $9.8 billion and $1 million respectively.
The reserve position in the IMF fell by $1 million to $1.243 billion.
Next week, the rupee movement will depend on the domestic stock market, the dealer said. "The rupee could be under pressure because of month-end demand. It could fall to 48.85-49," the dealer said.
How strong is dollar-commodities link?
One of the most enduring perceptions in global markets is about the inverse relationship between the US dollar and commodity prices. In fact, such an inverse relationship and of the causation – running from the dollar to commodities - is considered almost axiomatic particularly when the dollar is on a weakening mode. Headlines such as "Tumbling dollar lifts metals on LME", "Gold hits new high as dollar crashes" and "Weaker dollar to push crude higher" are well reflective of this widely held view.
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How valid is this perception? Is it supported by price movements in the dollar and commodities over long periods of time? Going beyond the validity of this relationship at the level of financial/commodity markets (from a trading perspective), how significant is this question at the level of economic policy formulation? If it can be established that the perceived dollar-commodities link is tenuous, at best, will that provide any signal for policymakers, particularly in emerging market economies (EMEs), such as India?
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These are the questions which come to the fore in the backdrop of the fairly sharp rise in commodities prices in recent months. This has come despite the dollar broadly holding its own against other major global currencies in the past few months. Indeed, despite the magnitude of problems the US economy (and the dollar potentially) faces, the US currency, on average, has remained stable against a basket of the currencies of its important trade partners. This means that while the dollar has lost value against some currencies, it has gained against others.
This development in the dollar-commodities complex, therefore, has been at variance with the widely held perception that rising commodities should be accompanied by a crashing dollar.
To be sure, this development is in the short-term and certainly cannot provide evidence for the existence/strength of any long-term relationship or otherwise between the dollar and commodities.
What history says
What is the evidence then from the long-term data on dollar and commodity prices?
Statistical analysis (static correlation analysis) of the historical returns on dollar and commodity prices shows that the widely held view about a "strong" inverse relationship between the two is not supported - both when the dollar is on the ascendant as well as when the US currency is on a declining trend.
The statistical analysis does support the a priori expectation of a negative relationship between the two. Global commodities, after all, are priced in dollars and other things remaining equal, price movements in the two variables should be in opposite directions.
But, importantly, the historical data show that the relationship goes only that far. Other factors have remained same only to the extent of not disturbing a basic, negative relationship between the two variables.
But, going further, these other factors have had a dominant influence on the level and direction of commodities prices in the past decade and more.
For the data analysis, we considered two time periods - one during which the dollar was rising and the other during when the dollar was on a declining trend. The dollar price studied here is the US currency's effective exchange rate (index) - this gives a summarised, average measure of the US currency against its major trading partners.
The dollar strengthening period is between May 1995 and April 1999 (remember the dollar hit its all-time low of 80 yen and 1.35 German marks in April 1995. From thereon, it was a recovery for the US currency - well captured by the "strong dollar" policy of Robert Rubin).
The weak dollar period has been taken as between May 2005 and April 2009. This period saw the US currency quoted at as low as 1.65 units to the euro, two units against the pound and at 90 yen - all close to its pre-April 1995 lows).
As for commodities, we have taken the time series data on gold, spot crude oil and an index of base metals prices.
Interpretation of results
As can be noted from the table, the correlation between the dollar and commodities, though negative, is quite weak. At -0.57, the correlation between gold and dollar is the highest in the 2005-2009 period. Despite this correlation estimate being statistically significant (that is, we can be 95 per cent confident that the actual correlation between the two is not zero and could, in fact, be even the estimated -0.57), it means that just around 30 per cent of the moves in one variable are in tune with the moves with the other. The relationship is even weaker for spot crude oil and base metals.
The weak relationship inference is more valid in the 1995-1999 period.
As can be seen, the correlation estimates are not even statistically significant for crude oil and base metals in that period. This means that there is probably zero correlation between the two and the dollar.
Another inference that can be made is that the relationship between the dollar and commodities (though weak overall) is (relatively) stronger when the dollar is on a weakening trend.
This can be explained as (partly) due to the portfolio diversification and risk minimisation strategies of investors exposed to dollar assets.
The macro signal
Going farther, these statistics also provide some signals for macroeconomic policymaking. The analysis shows that the relation between the dollar and commodities is not secure. Even during the recent period of fairly severe dollar weakness, the sympathetic movement in commodities was limited. Forces larger than the dollar's value seem to have played a dominant role in driving up commodities prices strongly in the period up to July 2008. One such key force was the pressure of demand from large EMEs such as China and India.
Per contra, we can expect that even if the dollar were to register a strong performance in the ensuing period, global commodities prices need not necessarily weaken.
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This dynamic probably has to be factored into demand (and inflation) management policies in the EMEs. We cannot explain away accommodative policies - fiscal and monetary - on the ground that global commodities prices are being driven by the dollar. Historical data seem to point otherwise.
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How valid is this perception? Is it supported by price movements in the dollar and commodities over long periods of time? Going beyond the validity of this relationship at the level of financial/commodity markets (from a trading perspective), how significant is this question at the level of economic policy formulation? If it can be established that the perceived dollar-commodities link is tenuous, at best, will that provide any signal for policymakers, particularly in emerging market economies (EMEs), such as India?
More India business stories
These are the questions which come to the fore in the backdrop of the fairly sharp rise in commodities prices in recent months. This has come despite the dollar broadly holding its own against other major global currencies in the past few months. Indeed, despite the magnitude of problems the US economy (and the dollar potentially) faces, the US currency, on average, has remained stable against a basket of the currencies of its important trade partners. This means that while the dollar has lost value against some currencies, it has gained against others.
This development in the dollar-commodities complex, therefore, has been at variance with the widely held perception that rising commodities should be accompanied by a crashing dollar.
To be sure, this development is in the short-term and certainly cannot provide evidence for the existence/strength of any long-term relationship or otherwise between the dollar and commodities.
What history says
What is the evidence then from the long-term data on dollar and commodity prices?
Statistical analysis (static correlation analysis) of the historical returns on dollar and commodity prices shows that the widely held view about a "strong" inverse relationship between the two is not supported - both when the dollar is on the ascendant as well as when the US currency is on a declining trend.
The statistical analysis does support the a priori expectation of a negative relationship between the two. Global commodities, after all, are priced in dollars and other things remaining equal, price movements in the two variables should be in opposite directions.
But, importantly, the historical data show that the relationship goes only that far. Other factors have remained same only to the extent of not disturbing a basic, negative relationship between the two variables.
But, going further, these other factors have had a dominant influence on the level and direction of commodities prices in the past decade and more.
For the data analysis, we considered two time periods - one during which the dollar was rising and the other during when the dollar was on a declining trend. The dollar price studied here is the US currency's effective exchange rate (index) - this gives a summarised, average measure of the US currency against its major trading partners.
The dollar strengthening period is between May 1995 and April 1999 (remember the dollar hit its all-time low of 80 yen and 1.35 German marks in April 1995. From thereon, it was a recovery for the US currency - well captured by the "strong dollar" policy of Robert Rubin).
The weak dollar period has been taken as between May 2005 and April 2009. This period saw the US currency quoted at as low as 1.65 units to the euro, two units against the pound and at 90 yen - all close to its pre-April 1995 lows).
As for commodities, we have taken the time series data on gold, spot crude oil and an index of base metals prices.
Interpretation of results
As can be noted from the table, the correlation between the dollar and commodities, though negative, is quite weak. At -0.57, the correlation between gold and dollar is the highest in the 2005-2009 period. Despite this correlation estimate being statistically significant (that is, we can be 95 per cent confident that the actual correlation between the two is not zero and could, in fact, be even the estimated -0.57), it means that just around 30 per cent of the moves in one variable are in tune with the moves with the other. The relationship is even weaker for spot crude oil and base metals.
The weak relationship inference is more valid in the 1995-1999 period.
As can be seen, the correlation estimates are not even statistically significant for crude oil and base metals in that period. This means that there is probably zero correlation between the two and the dollar.
Another inference that can be made is that the relationship between the dollar and commodities (though weak overall) is (relatively) stronger when the dollar is on a weakening trend.
This can be explained as (partly) due to the portfolio diversification and risk minimisation strategies of investors exposed to dollar assets.
The macro signal
Going farther, these statistics also provide some signals for macroeconomic policymaking. The analysis shows that the relation between the dollar and commodities is not secure. Even during the recent period of fairly severe dollar weakness, the sympathetic movement in commodities was limited. Forces larger than the dollar's value seem to have played a dominant role in driving up commodities prices strongly in the period up to July 2008. One such key force was the pressure of demand from large EMEs such as China and India.
Per contra, we can expect that even if the dollar were to register a strong performance in the ensuing period, global commodities prices need not necessarily weaken.
More India business stories
This dynamic probably has to be factored into demand (and inflation) management policies in the EMEs. We cannot explain away accommodative policies - fiscal and monetary - on the ground that global commodities prices are being driven by the dollar. Historical data seem to point otherwise.
India Forex Reserves Increase
Friday, the Reserve Bank of India said in a report that nation's foreign exchange reserves stood at US$ 267.711 billion as on July 24, up from US$ 266.187 billion as on July 17.
At the same time, gold reserves remained unchanged at US$ 9,800 billion. Foreign currency assets amounted to US$ 256.657 billion, larger than the US$ 255.138 billion in the previous week.
Meanwhile, nation's reserve position with the International Monetary Fund totaled US$ 1.253 billion versus US$ 1.248 billion in the preceding week.
At the same time, gold reserves remained unchanged at US$ 9,800 billion. Foreign currency assets amounted to US$ 256.657 billion, larger than the US$ 255.138 billion in the previous week.
Meanwhile, nation's reserve position with the International Monetary Fund totaled US$ 1.253 billion versus US$ 1.248 billion in the preceding week.
Forex Market in India - Foreign Exchange Markets in India
Since the onset of liberalization, foreign exchange markets have witnessed explosive growth in trading volume. The importance of the exchange rate to the Indian economy has also been greater than ever before. While the government has explicitly adopted a flexible exchange rate regime, in practice the rupee is one of most efficient trackers of the US dollar. Apprehensions of capital flow-driven currency crisis have held India back from capital account convertibility though the debate continues. The rupee’s deviations from Covered Interest Parity (with respect to the dollar) exhibit relatively long-lived swings. An inevitable side-effect of the Indian exchange rate policy has been the ballooning of foreign exchange reserves to well over a hundred billion dollars. In an unprecedented move, the government is considering using part of these reserves to finance infrastructure investments in the country
Keywords: Foreign exchange in India, India, Forex Market in India
Keywords: Foreign exchange in India, India, Forex Market in India
Foreign Exchange Market in India
Foreign Exchange Market in India works under the central government in India and executes wide powers to control transactions in foreign exchange.
The Foreign Exchange Management Act, 1999 or FEMA regulates the whole foreign exchange market in India. Before this act was introduced, the foreign exchange market in India was regulated by the reserve bank of India through the Exchange Control Department, by the FERA or Foreign Exchange Regulation Act, 1947. After independence, FERA was introduced as a temporary measure to regulate the inflow of the foreign capital. But with the economic and industrial development, the need for conservation of foreign currency was urgently felt and on the recommendation of the Public Accounts Committee, the Indian government passed the Foreign Exchange Regulation Act, 1973 and gradually, this act became famous as FEMA.
Foreign Exchange Market in India, Indian Economy
Until 1992 all foreign investments in India and the repatriation of foreign capital required previous approval of the government. The Foreign-Exchange Regulation Act rarely allowed foreign majority holdings for foreign exchange in India. However, a new foreign investment policy announced in July 1991, declared automatic approval for foreign exchange in India for thirty-four industries. These industries were designated with high priority, up to an equivalent limit of 51 percent. The foreign exchange market in India is regulated by the reserve bank of India through the Exchange Control Department.
Initially the government required that a company`s routine approval must rely on identical exports and dividend repatriation, but in May 1992 this requirement of foreign exchange in India was lifted, with an exception to low-priority sectors. In 1994 foreign and nonresident Indian investors were permitted to repatriate not only their profits but also their capital for foreign exchange in India. Indian exporters are enjoying the freedom to use their export earnings as they find it suitable. However, transfer of capital abroad by Indian nationals is only allowed in particular circumstances, such as emigration. Foreign exchange in India is automatically made accessible for imports for which import licenses are widely issued.
Indian authorities are able to manage the exchange rate easily, only because foreign exchange transactions in India are so securely controlled. From 1975 to 1992 the rupee was coupled to a trade-weighted basket of currencies. In February 1992, the Indian government started to make the rupee convertible, and in March 1993 a single floating exchange rate in the market of foreign exchange in India was implemented. In July 1995, Rs 31.81 was worth US$1, as compared to Rs 7.86 in 1980, Rs 12.37 in 1985, and Rs17.50 in 1990.
Since the onset of liberalization, foreign exchange markets in India have witnessed explosive growth in trading capacity. The importance of the exchange rate of foreign exchange in India for the Indian economy has also been far greater than ever before. While the Indian government has clearly adopted a flexible exchange rate regime, in practice the rupee is one of most resourceful trackers of the US dollar.
Predictions of capital flow-driven currency crisis have held India back from capital account convertibility, as stated by experts. The rupee`s deviations from Covered Interest Parity as compared to the dollar) display relatively long-lived swings. An inevitable side effect of the foreign exchange rate policy in India has been the ballooning of foreign exchange reserves to over a hundred billion dollars. In an unparalleled move, the government is considering to use part of these reserves to sponsor infrastructure investments in the country.
The foreign exchange market India is growing very rapidly, since the annual turnover of the market is more than $400 billion. This foreign exchange transaction in India does not include the inter-bank transactions. According to the record of foreign exchange in India, RBI released these transactions. The average monthly turnover in the merchant segment was $40.5 billion in 2003-04 and the inter-bank transaction was $134.2 for the same period. The average total monthly turnover in the sector of foreign exchange in India was about $174.7 billion for the same period. The transactions are made on spot and also on forward basis, which include currency swaps and interest rate swaps.
The Indian foreign exchange market is made up of the buyers, sellers, market mediators and the monetary authority of India. The main center of foreign exchange in India is Mumbai, the commercial capital of the country. There are several other centers for foreign exchange transactions in India including the major cities of Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin. With the development of technologies, all the foreign exchange markets of India work collectively and in much easier process.
Foreign Exchange Dealers Association is a voluntary association that also provides some help in regulating the market. The Authorized Dealers and the attributed brokers are qualified to participate in the foreign Exchange markets of India. When the foreign exchange trade is going on between Authorized Dealers and RBI or between the Authorized Dealers and the overseas banks, the brokers usually do not have any role to play. Besides the Authorized Dealers and brokers, there are some others who are provided with the limited rights to accept the foreign currency or travelers` cheque, they are the authorized moneychangers, travel agents, certain hotels and government shops. The IDBI and Exim bank are also permitted at specific times to hold foreign currency.
The Foreign Exchange Market in India is a flourishing ground of profit and higher initiatives are taken by the central government in order to strengthen the foundation
The Foreign Exchange Management Act, 1999 or FEMA regulates the whole foreign exchange market in India. Before this act was introduced, the foreign exchange market in India was regulated by the reserve bank of India through the Exchange Control Department, by the FERA or Foreign Exchange Regulation Act, 1947. After independence, FERA was introduced as a temporary measure to regulate the inflow of the foreign capital. But with the economic and industrial development, the need for conservation of foreign currency was urgently felt and on the recommendation of the Public Accounts Committee, the Indian government passed the Foreign Exchange Regulation Act, 1973 and gradually, this act became famous as FEMA.
Foreign Exchange Market in India, Indian Economy
Until 1992 all foreign investments in India and the repatriation of foreign capital required previous approval of the government. The Foreign-Exchange Regulation Act rarely allowed foreign majority holdings for foreign exchange in India. However, a new foreign investment policy announced in July 1991, declared automatic approval for foreign exchange in India for thirty-four industries. These industries were designated with high priority, up to an equivalent limit of 51 percent. The foreign exchange market in India is regulated by the reserve bank of India through the Exchange Control Department.
Initially the government required that a company`s routine approval must rely on identical exports and dividend repatriation, but in May 1992 this requirement of foreign exchange in India was lifted, with an exception to low-priority sectors. In 1994 foreign and nonresident Indian investors were permitted to repatriate not only their profits but also their capital for foreign exchange in India. Indian exporters are enjoying the freedom to use their export earnings as they find it suitable. However, transfer of capital abroad by Indian nationals is only allowed in particular circumstances, such as emigration. Foreign exchange in India is automatically made accessible for imports for which import licenses are widely issued.
Indian authorities are able to manage the exchange rate easily, only because foreign exchange transactions in India are so securely controlled. From 1975 to 1992 the rupee was coupled to a trade-weighted basket of currencies. In February 1992, the Indian government started to make the rupee convertible, and in March 1993 a single floating exchange rate in the market of foreign exchange in India was implemented. In July 1995, Rs 31.81 was worth US$1, as compared to Rs 7.86 in 1980, Rs 12.37 in 1985, and Rs17.50 in 1990.
Since the onset of liberalization, foreign exchange markets in India have witnessed explosive growth in trading capacity. The importance of the exchange rate of foreign exchange in India for the Indian economy has also been far greater than ever before. While the Indian government has clearly adopted a flexible exchange rate regime, in practice the rupee is one of most resourceful trackers of the US dollar.
Predictions of capital flow-driven currency crisis have held India back from capital account convertibility, as stated by experts. The rupee`s deviations from Covered Interest Parity as compared to the dollar) display relatively long-lived swings. An inevitable side effect of the foreign exchange rate policy in India has been the ballooning of foreign exchange reserves to over a hundred billion dollars. In an unparalleled move, the government is considering to use part of these reserves to sponsor infrastructure investments in the country.
The foreign exchange market India is growing very rapidly, since the annual turnover of the market is more than $400 billion. This foreign exchange transaction in India does not include the inter-bank transactions. According to the record of foreign exchange in India, RBI released these transactions. The average monthly turnover in the merchant segment was $40.5 billion in 2003-04 and the inter-bank transaction was $134.2 for the same period. The average total monthly turnover in the sector of foreign exchange in India was about $174.7 billion for the same period. The transactions are made on spot and also on forward basis, which include currency swaps and interest rate swaps.
The Indian foreign exchange market is made up of the buyers, sellers, market mediators and the monetary authority of India. The main center of foreign exchange in India is Mumbai, the commercial capital of the country. There are several other centers for foreign exchange transactions in India including the major cities of Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin. With the development of technologies, all the foreign exchange markets of India work collectively and in much easier process.
Foreign Exchange Dealers Association is a voluntary association that also provides some help in regulating the market. The Authorized Dealers and the attributed brokers are qualified to participate in the foreign Exchange markets of India. When the foreign exchange trade is going on between Authorized Dealers and RBI or between the Authorized Dealers and the overseas banks, the brokers usually do not have any role to play. Besides the Authorized Dealers and brokers, there are some others who are provided with the limited rights to accept the foreign currency or travelers` cheque, they are the authorized moneychangers, travel agents, certain hotels and government shops. The IDBI and Exim bank are also permitted at specific times to hold foreign currency.
The Foreign Exchange Market in India is a flourishing ground of profit and higher initiatives are taken by the central government in order to strengthen the foundation
RESERVE BANK OF INDIA FOREIGN EXCHANGE
1.RESERVE BANK OF INDIA
FOREIGN EXCHANGE DEPARTMENT
2.Eligibility
All resident individuals are eligible to avail of the facility under the scheme. The
facility will not be available to corporates, partnership firms, HUF, Trusts, etc.
3. Purpose
3.1 This facility is available for making remittance up to USD 25,000 per calendar
year for any current or capital account transactions or a combination of both.
3.2 Under this facility, resident individuals will be free to acquire and hold immovable
property or shares or any other asset outside India without prior approval of the Reserve
Bank. Individuals will also be able to open, maintain and hold foreign currency accounts
with a bank outside India for making remittances under the scheme without prior
approval of Reserve Bank. The foreign currency account may be used for putting
through all transactions connected with or arising from remittances eligible under this
scheme.
3.3 It is further clarified that the facility under the scheme is in addition to those
already available for private travel, business travel, gift remittances, donations, studies,
medical treatment etc as described in Schedule III of Foreign Exchange Management
(Current Account Transactions) Rules, 2000. (Annexure B).
3.4 The remittance facility under the scheme is not available for the following:
i) Remittance for any purpose specifically prohibited under Schedule-I (like
purchase of lottery/sweep stakes, tickets proscribed magazines etc) or any
item restricted under Schedule II of Foreign Exchange Management (Current
Account Transactions) Rules, 2000. (Annexure B).
ii) Remittances made directly or indirectly to Bhutan, Nepal, Mauritius or
Pakistan.
iii) Remittances made directly or indirectly to countries identified by the Financial
Action Task Force (FATF) as “non co-operative countries and territories” viz
Cook Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria,
Philippines and Ukraine.
iv) Remittances directly or indirectly to those individuals and entities identified as
posing significant risk of committing acts of terrorism as advised separately by
the Reserve Bank to the banks.
4. Remittance Procedure
Requirements to be complied with by the remitter
4.1 To avail of this facility, the individual will have to designate a branch of an AD
through which all the remittances under the scheme will be made.
4.2 The resident individual seeking to make the remittance should furnish an
application letter cum declaration in the format as indicated in Annexure–A regarding
the purpose of the remittance and declaration that the funds belong to the remitter and
will not be used for the purposes as detailed above.
Requirements to be complied with by the Authorised Dealers
4.3 While allowing the facility to resident individuals, Authorised Dealers are required
to ensure that the "Know Your Customer" Guidelines have been implemented in
respect of these accounts. They should also comply with the Anti-Money Laundering
Rules in force while allowing the facility.
4.4 The applicants should have maintained the bank account with the bank for a
minimum period of one year prior to the remittance. If the applicant seeking to make the
remittance is a new customer of the bank, Authorised Dealers should carry out due
diligence on the opening, operation and maintenance of the account. Further the AD
should obtain bank statement for the previous year from the applicant to satisfy
themselves regarding the source of funds. If such a bank statement is not available,
copies of the latest Income Tax Assessment Order or Return filed by the applicant may
be obtained.
4.5 The AD should ensure that the payment is received out of funds belonging to the
person seeking to make the remittance, by a cheque drawn on the applicant's bank
account or by debit to his account or by Demand Draft / Pay Order.
4.6 Authorised dealer should certify that the remittance is not being made directly or
indirectly by /or to ineligible entities and that the remittances are made in accordance
with the instructions contained herein.
5. Reporting of the transactions
The remittances made under this Scheme will be reported in the R-Return in the
normal course. The ADs may also prepare and keep on record dummy Form A2, in
respect of remittances exceeding USD 5000. Authorised Dealers may arrange to
furnish on a quarterly basis, information on the number of applicants and total amount
remitted to the Chief General Manager, External Payment Division, Foreign Exchange
Department, Reserve Bank of India, Central Office, Mumbai-400001.
6. Necessary amendments to the relevant Foreign Exchange Management
Regulations, 2000 as also the relevant Notifications, issued under FEMA, 1999 are
being issued separately.
7. Authorised Dealers may bring the contents of this circular to the notice of their
constituents concerned.
8. The directions contained in this circular have been issued under Sections 10(4) and
11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999).
FOREIGN EXCHANGE DEPARTMENT
2.Eligibility
All resident individuals are eligible to avail of the facility under the scheme. The
facility will not be available to corporates, partnership firms, HUF, Trusts, etc.
3. Purpose
3.1 This facility is available for making remittance up to USD 25,000 per calendar
year for any current or capital account transactions or a combination of both.
3.2 Under this facility, resident individuals will be free to acquire and hold immovable
property or shares or any other asset outside India without prior approval of the Reserve
Bank. Individuals will also be able to open, maintain and hold foreign currency accounts
with a bank outside India for making remittances under the scheme without prior
approval of Reserve Bank. The foreign currency account may be used for putting
through all transactions connected with or arising from remittances eligible under this
scheme.
3.3 It is further clarified that the facility under the scheme is in addition to those
already available for private travel, business travel, gift remittances, donations, studies,
medical treatment etc as described in Schedule III of Foreign Exchange Management
(Current Account Transactions) Rules, 2000. (Annexure B).
3.4 The remittance facility under the scheme is not available for the following:
i) Remittance for any purpose specifically prohibited under Schedule-I (like
purchase of lottery/sweep stakes, tickets proscribed magazines etc) or any
item restricted under Schedule II of Foreign Exchange Management (Current
Account Transactions) Rules, 2000. (Annexure B).
ii) Remittances made directly or indirectly to Bhutan, Nepal, Mauritius or
Pakistan.
iii) Remittances made directly or indirectly to countries identified by the Financial
Action Task Force (FATF) as “non co-operative countries and territories” viz
Cook Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria,
Philippines and Ukraine.
iv) Remittances directly or indirectly to those individuals and entities identified as
posing significant risk of committing acts of terrorism as advised separately by
the Reserve Bank to the banks.
4. Remittance Procedure
Requirements to be complied with by the remitter
4.1 To avail of this facility, the individual will have to designate a branch of an AD
through which all the remittances under the scheme will be made.
4.2 The resident individual seeking to make the remittance should furnish an
application letter cum declaration in the format as indicated in Annexure–A regarding
the purpose of the remittance and declaration that the funds belong to the remitter and
will not be used for the purposes as detailed above.
Requirements to be complied with by the Authorised Dealers
4.3 While allowing the facility to resident individuals, Authorised Dealers are required
to ensure that the "Know Your Customer" Guidelines have been implemented in
respect of these accounts. They should also comply with the Anti-Money Laundering
Rules in force while allowing the facility.
4.4 The applicants should have maintained the bank account with the bank for a
minimum period of one year prior to the remittance. If the applicant seeking to make the
remittance is a new customer of the bank, Authorised Dealers should carry out due
diligence on the opening, operation and maintenance of the account. Further the AD
should obtain bank statement for the previous year from the applicant to satisfy
themselves regarding the source of funds. If such a bank statement is not available,
copies of the latest Income Tax Assessment Order or Return filed by the applicant may
be obtained.
4.5 The AD should ensure that the payment is received out of funds belonging to the
person seeking to make the remittance, by a cheque drawn on the applicant's bank
account or by debit to his account or by Demand Draft / Pay Order.
4.6 Authorised dealer should certify that the remittance is not being made directly or
indirectly by /or to ineligible entities and that the remittances are made in accordance
with the instructions contained herein.
5. Reporting of the transactions
The remittances made under this Scheme will be reported in the R-Return in the
normal course. The ADs may also prepare and keep on record dummy Form A2, in
respect of remittances exceeding USD 5000. Authorised Dealers may arrange to
furnish on a quarterly basis, information on the number of applicants and total amount
remitted to the Chief General Manager, External Payment Division, Foreign Exchange
Department, Reserve Bank of India, Central Office, Mumbai-400001.
6. Necessary amendments to the relevant Foreign Exchange Management
Regulations, 2000 as also the relevant Notifications, issued under FEMA, 1999 are
being issued separately.
7. Authorised Dealers may bring the contents of this circular to the notice of their
constituents concerned.
8. The directions contained in this circular have been issued under Sections 10(4) and
11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999).
FOREX MARKET HOURS
At 7:00 pm Sunday, New York time, trading begins as markets open in Tokyo, Japan. Next, Singapore and Hong Kong open at 9:00 pm EST, followed by the European markets in Frankfurt (2:00 am), and then London (3:00 am). By 4:00 am, the European markets are in full swing, and Asia has concluded their trading day. The U.S. markets open first in New York around 8:00 am Monday, as Europe winds down. Australia will take over around 5:00 pm, and by 7:00 pm Tokyo is ready to re-open.
All times are quoted in Eastern Standard Time (New York).
FX or Forex, currency trading is the trading of one currency against another. In terms of trading volume, the currency exchange market is the world's largest market, with daily trading volumes in excess of $1.5 trillion US dollars. This is orders of magnitude larger than the bond or stock markets. The New York Stock Exchange, for example, has a daily trading volume of approximately $50 billion.
Currencies are traded for hedging and speculative purposes. Various market participants such as individuals, corporations, and institutions trade forex for one or both reasons.
Corporate treasurers, private individuals and investors have currency exposures during the the regular course of business. The FXTrade Platform is an ideal platform to hedge any such exposure. An investor, who has bought a European stock and expects the EUR exchange rate to decline, can hedge his currency exposure by selling the EUR against the USD.
Currency markets are ideally suited for speculative trading. The foreign exchange market
has a daily volume in excess of 1.5 trillion USD, which is 50 times the size of the transaction volume of all the equity markets taken together. This makes the foreign exchange market, by far, the most liquid and efficient financial market of the world. Thanks to its efficiency, there is little or no slippage of market price for the execution of even large buy and sell orders. Traders are able to take advantage of intra-day volatility thanks to the low spreads and enter positions for short time periods, such as minutes and hours. Unlike equity trading, where restrictions limit a trader's ability to profit from a market down turn, there are no such constraints on currency trading. Currency traders can take advantage of both up and down trends thus increasing their profit potential.
The most commonly traded currencies are: USD, EUR, JPY, GBP, CHF, CAD and AUD.
The most commonly traded currency pair is EUR/USD.
Forex Symbol Guide
Symbol Currency Pair Trading Terminology
GBP/USD British Pound / US Dollar "Cable"
EUR/USD Euro / US Dollar "Euro"
USD/JPY US Dollar / Japanese Yen "Dollar Yen"
USD/CHF US Dollar / Swiss Franc "Dollar Swiss", or "Swissy"
USD/CAD US Dollar / Canadian Dollar "Dollar Canada"
AUD/USD Australian Dollar / US Dollar "Aussie Dollar"
EUR/GBP Euro / British Pound "Euro Sterling"
EUR/JPY Euro / Japanese Yen "Euro Yen"
EUR/CHF Euro / Swiss Franc "Euro Swiss"
GBP/CHF British Pound / Swiss Franc "Sterling Swiss"
GBP/JPY British Pound / Japanese Yen "Sterling Yen"
CHF/JPY Swiss Franc / Japanese Yen "Swiss Yen"
NZD/USD New Zealand Dollar / US Dollar "New Zealand Dollar" or "Kiwi"
USD/ZAR US Dollar / South African Rand "Dollar Zar" or "South African Rand"
GLD/USD Spot Gold "Gold"
SLV/USD Spot Silver "Silver"
CURRENCY PAIRS
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.
SPOT FOREX
Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EUR/USD. That is, sell Euros and buy US dollars. The following is guide for quoting conventions:
What does it mean to be "long" or "short" a currency?
Being long means buying a currency. Being short means selling a currency.
If a trader goes long USD/JPY, he or she buys US Dollars and sells Japanese Yen. Buying a currency is synonymous with taking a long position in that currency. A trader takes a long position in a currency if he or she believes it will appreciate in value.
If a trader goes short USD/JPY, he or she sells US Dollars and buys Japanese Yen. Selling a currency is synonymous with shorting that currency. A trader would short a currency if he or she believes it will depreciate in value.
CURRENCY TRADING: BUYING AND SELLING CURRENCIES
All Forex trades result in the buying of one currency and the selling of another (currency trading), simultaneously.
Buying ("going long") the currency pair implies buying the first, base currency and selling an equivalent amount of the second, quote currency (to pay for the base currency). It is not necessary to own the quote currency prior to selling, as it is sold short. A trader buys a currency pair if he/she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up.
Selling ("going short") the currency pair implies selling the first, base currency, and buying the second, quote currency. A trader sells a currency pair if he/she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.
An open trade or position is one in which a trader has either bought or sold one currency pair and has not sold or bought back an adequate amount of that currency pair to effectively close the trade. When a trader has an open trade or position, he/she stands to profit or lose from fluctuations in the price of that currency pair.
Forex is the backbone of all international capital transactions. Compared to the slim profit margins rendered in other areas of commercial banking, huge profits are generally produced in a matter of minutes form minor currency market movements. Some banks generate 60% of their profits from trading currency aggressively.
Trading volume has been growing at a rate of 25% per year since the mid-1980s and therefore it is not difficult to accept the notion that the currency market is one of the world fastest growing industries. What used to require days to accomplish in Europe or Asia now oly takes a few minutes. Needless to say, technology has changed everything and millions of Dollars are moved from one currency into another every second of every day by major banks through computers and for the average investor, with the touch of a computer key.
Foreign exchange is the backbone of all international capital transactions. Compared to the slim profit margins rendered in other areas of commercial banking, huge profits are generally produced in a matter of minutes from minor currency options market movements. Some banks generate up to 60% of their profits from trading currency aggressively.
Transactions in foreign currencies take place when one country's currency is purchased (exchanged) with another country's currency. The price agreed upon or negotiated for the currency purchased is referred to as the foreign exchange rate. Major commercial banks in the money market centers throughout the world are responsible for the majority of foreign currencies bought and sold.
Trading volume has been growing at a rate of 25% per year since the mid-1980s and therefore it is not difficult to accept the notion that the currency options is the world\'s fastest growing industry. What used to require days to accomplish in Europe or Asia now only takes a few minutes. Needless to say, technology has changed everything and millions of Dollars are moved from one currency into another every second of every day by major banks through computers and for the average investor, with the touch of a phone.
FOREX BASICS - What's a PIP
A "pip" is the smallest increment in any currency pair. In EUR/USD, a movement from .8951 to .8952 is one pip, so a pip is .0001. In USD/JPY, a movement from 130.45 to 130.46 is one pip, so a pip is .01.
CALCULATING THE WORTH OF A PIP
How much in dollars is this movement worth, for example, per 10,000 Euros in EUR/USD? How much is one pip worth per 10,000 Dollars in USD/JPY? We will refer to the size, in this case 10,000 units of the base currency, as the "Notional Amount". The formula for calculating a pip value is therefore:
(one pip, with proper decimal placement / currency exchange rate) x (Notional Amount)
Using USD/JPY as an example, this yields:
(.01/130.46) x USD 10,000 = $0.77 or 77 cents per pip
Using EUR/USD as an example, we have:
(.0001/.8942) x EUR 10,000 = EUR 1.1183
But we want the pip value in USD, so we then must multiply EUR 1.1183 x (EUR/USD exchange rate): EUR 1.1183 x .8942 = $1.00
This is in fact a phenomenon you will see with any currency in which the currency is quoted first (such as EUR/USD or GBP/USD): the pip value is always $1.00 per 10,000 currency units. This is why pip (or "tick") values in currency futures, where the currency is quoted first, are always fixed.
Approximate pip values for the major currencies are as follows, per 10,000 units of the base currency:
USD/JPY: 1 pip = $.77 (i.e. a change from 130.45 to 130.46 is worth about $.77 per $10,000)
EUR/USD: 1 pip = $1.00 (.8941 to .8942 is worth $1.00 per 10,000 Euros)
GBP/USD: 1 pip = $1.00 (1.4765 to 1.4766 is worth $1.00 per 10,000 Pounds)
USD/CHF: 1 pip = $.59 (1.6855 to 1.6866 is worth $.59 per $10,000)
Spread
The spread is the difference between the price that you can sell currency at ( Bid) and the price you can buy currency at ( Ask). The spread on majors is usually 3 pips under normal market conditions.
Market Hours
The spot Forex market is unique to any other market in the world; trading 24-hours a day. Somewhere around the world a financial center is open for business and banks and other institutions exchange currencies every hour of the day and night, only stopping briefly on the weekend. Foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their trading day and the ability to take advantage of global economic events.
FOREX or The Foreign exchange rate market is an international market where various currency exchange transactions take place; this is in the shape of simultaneously buying one currency and selling another. The most commonly traded currencies are referred to as “Majors”; over 85% of daily transactions on Forex trading involve the Majors. These seven currencies are the US Currency (Dollar, USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD) and Australian Dollar (AUD). The Forex system in operation today was established in the 1970s when free currency exchange rates were introduced, this period also saw the US Dollar overtake the British Pound as the benchmark currency. Prior to this and in particular during World War II, exchange rate remained more stable.
Forex trading in simplest terms is the buying of one currency and the selling of another. Forex trading, also referred to, as “FX” is open to corporations, small businesses, commercial banks, investment funds and private individuals, it is the largest financial market in the world averaging a daily turnover of over $1 trillion dollars, making it a diverse and exciting market. It is a 24-hour market enabling it to accommodate constant changing world currency exchange rates . According to New York time, trading begins at 2.15pm on Sunday in Sydney and Singapore and progresses through to Tokyo at 7pm, London at 2am and reaches New York at 8am. This leaves investors free to respond to global political, economic and social events when they take place, day or night.
Unlike trading on the stock market, the forex market is not conducted by a central exchange, but on the “interbank” market, which is thought of as an OTC (over the counter) market. Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centres means that the forex market is a 24-hour market.
All times are quoted in Eastern Standard Time (New York).
FX or Forex, currency trading is the trading of one currency against another. In terms of trading volume, the currency exchange market is the world's largest market, with daily trading volumes in excess of $1.5 trillion US dollars. This is orders of magnitude larger than the bond or stock markets. The New York Stock Exchange, for example, has a daily trading volume of approximately $50 billion.
Currencies are traded for hedging and speculative purposes. Various market participants such as individuals, corporations, and institutions trade forex for one or both reasons.
Corporate treasurers, private individuals and investors have currency exposures during the the regular course of business. The FXTrade Platform is an ideal platform to hedge any such exposure. An investor, who has bought a European stock and expects the EUR exchange rate to decline, can hedge his currency exposure by selling the EUR against the USD.
Currency markets are ideally suited for speculative trading. The foreign exchange market
has a daily volume in excess of 1.5 trillion USD, which is 50 times the size of the transaction volume of all the equity markets taken together. This makes the foreign exchange market, by far, the most liquid and efficient financial market of the world. Thanks to its efficiency, there is little or no slippage of market price for the execution of even large buy and sell orders. Traders are able to take advantage of intra-day volatility thanks to the low spreads and enter positions for short time periods, such as minutes and hours. Unlike equity trading, where restrictions limit a trader's ability to profit from a market down turn, there are no such constraints on currency trading. Currency traders can take advantage of both up and down trends thus increasing their profit potential.
The most commonly traded currencies are: USD, EUR, JPY, GBP, CHF, CAD and AUD.
The most commonly traded currency pair is EUR/USD.
Forex Symbol Guide
Symbol Currency Pair Trading Terminology
GBP/USD British Pound / US Dollar "Cable"
EUR/USD Euro / US Dollar "Euro"
USD/JPY US Dollar / Japanese Yen "Dollar Yen"
USD/CHF US Dollar / Swiss Franc "Dollar Swiss", or "Swissy"
USD/CAD US Dollar / Canadian Dollar "Dollar Canada"
AUD/USD Australian Dollar / US Dollar "Aussie Dollar"
EUR/GBP Euro / British Pound "Euro Sterling"
EUR/JPY Euro / Japanese Yen "Euro Yen"
EUR/CHF Euro / Swiss Franc "Euro Swiss"
GBP/CHF British Pound / Swiss Franc "Sterling Swiss"
GBP/JPY British Pound / Japanese Yen "Sterling Yen"
CHF/JPY Swiss Franc / Japanese Yen "Swiss Yen"
NZD/USD New Zealand Dollar / US Dollar "New Zealand Dollar" or "Kiwi"
USD/ZAR US Dollar / South African Rand "Dollar Zar" or "South African Rand"
GLD/USD Spot Gold "Gold"
SLV/USD Spot Silver "Silver"
CURRENCY PAIRS
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.
SPOT FOREX
Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EUR/USD. That is, sell Euros and buy US dollars. The following is guide for quoting conventions:
What does it mean to be "long" or "short" a currency?
Being long means buying a currency. Being short means selling a currency.
If a trader goes long USD/JPY, he or she buys US Dollars and sells Japanese Yen. Buying a currency is synonymous with taking a long position in that currency. A trader takes a long position in a currency if he or she believes it will appreciate in value.
If a trader goes short USD/JPY, he or she sells US Dollars and buys Japanese Yen. Selling a currency is synonymous with shorting that currency. A trader would short a currency if he or she believes it will depreciate in value.
CURRENCY TRADING: BUYING AND SELLING CURRENCIES
All Forex trades result in the buying of one currency and the selling of another (currency trading), simultaneously.
Buying ("going long") the currency pair implies buying the first, base currency and selling an equivalent amount of the second, quote currency (to pay for the base currency). It is not necessary to own the quote currency prior to selling, as it is sold short. A trader buys a currency pair if he/she believes the base currency will go up relative to the quote currency, or equivalently that the corresponding exchange rate will go up.
Selling ("going short") the currency pair implies selling the first, base currency, and buying the second, quote currency. A trader sells a currency pair if he/she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.
An open trade or position is one in which a trader has either bought or sold one currency pair and has not sold or bought back an adequate amount of that currency pair to effectively close the trade. When a trader has an open trade or position, he/she stands to profit or lose from fluctuations in the price of that currency pair.
Forex is the backbone of all international capital transactions. Compared to the slim profit margins rendered in other areas of commercial banking, huge profits are generally produced in a matter of minutes form minor currency market movements. Some banks generate 60% of their profits from trading currency aggressively.
Trading volume has been growing at a rate of 25% per year since the mid-1980s and therefore it is not difficult to accept the notion that the currency market is one of the world fastest growing industries. What used to require days to accomplish in Europe or Asia now oly takes a few minutes. Needless to say, technology has changed everything and millions of Dollars are moved from one currency into another every second of every day by major banks through computers and for the average investor, with the touch of a computer key.
Foreign exchange is the backbone of all international capital transactions. Compared to the slim profit margins rendered in other areas of commercial banking, huge profits are generally produced in a matter of minutes from minor currency options market movements. Some banks generate up to 60% of their profits from trading currency aggressively.
Transactions in foreign currencies take place when one country's currency is purchased (exchanged) with another country's currency. The price agreed upon or negotiated for the currency purchased is referred to as the foreign exchange rate. Major commercial banks in the money market centers throughout the world are responsible for the majority of foreign currencies bought and sold.
Trading volume has been growing at a rate of 25% per year since the mid-1980s and therefore it is not difficult to accept the notion that the currency options is the world\'s fastest growing industry. What used to require days to accomplish in Europe or Asia now only takes a few minutes. Needless to say, technology has changed everything and millions of Dollars are moved from one currency into another every second of every day by major banks through computers and for the average investor, with the touch of a phone.
FOREX BASICS - What's a PIP
A "pip" is the smallest increment in any currency pair. In EUR/USD, a movement from .8951 to .8952 is one pip, so a pip is .0001. In USD/JPY, a movement from 130.45 to 130.46 is one pip, so a pip is .01.
CALCULATING THE WORTH OF A PIP
How much in dollars is this movement worth, for example, per 10,000 Euros in EUR/USD? How much is one pip worth per 10,000 Dollars in USD/JPY? We will refer to the size, in this case 10,000 units of the base currency, as the "Notional Amount". The formula for calculating a pip value is therefore:
(one pip, with proper decimal placement / currency exchange rate) x (Notional Amount)
Using USD/JPY as an example, this yields:
(.01/130.46) x USD 10,000 = $0.77 or 77 cents per pip
Using EUR/USD as an example, we have:
(.0001/.8942) x EUR 10,000 = EUR 1.1183
But we want the pip value in USD, so we then must multiply EUR 1.1183 x (EUR/USD exchange rate): EUR 1.1183 x .8942 = $1.00
This is in fact a phenomenon you will see with any currency in which the currency is quoted first (such as EUR/USD or GBP/USD): the pip value is always $1.00 per 10,000 currency units. This is why pip (or "tick") values in currency futures, where the currency is quoted first, are always fixed.
Approximate pip values for the major currencies are as follows, per 10,000 units of the base currency:
USD/JPY: 1 pip = $.77 (i.e. a change from 130.45 to 130.46 is worth about $.77 per $10,000)
EUR/USD: 1 pip = $1.00 (.8941 to .8942 is worth $1.00 per 10,000 Euros)
GBP/USD: 1 pip = $1.00 (1.4765 to 1.4766 is worth $1.00 per 10,000 Pounds)
USD/CHF: 1 pip = $.59 (1.6855 to 1.6866 is worth $.59 per $10,000)
Spread
The spread is the difference between the price that you can sell currency at ( Bid) and the price you can buy currency at ( Ask). The spread on majors is usually 3 pips under normal market conditions.
Market Hours
The spot Forex market is unique to any other market in the world; trading 24-hours a day. Somewhere around the world a financial center is open for business and banks and other institutions exchange currencies every hour of the day and night, only stopping briefly on the weekend. Foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their trading day and the ability to take advantage of global economic events.
FOREX or The Foreign exchange rate market is an international market where various currency exchange transactions take place; this is in the shape of simultaneously buying one currency and selling another. The most commonly traded currencies are referred to as “Majors”; over 85% of daily transactions on Forex trading involve the Majors. These seven currencies are the US Currency (Dollar, USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD) and Australian Dollar (AUD). The Forex system in operation today was established in the 1970s when free currency exchange rates were introduced, this period also saw the US Dollar overtake the British Pound as the benchmark currency. Prior to this and in particular during World War II, exchange rate remained more stable.
Forex trading in simplest terms is the buying of one currency and the selling of another. Forex trading, also referred to, as “FX” is open to corporations, small businesses, commercial banks, investment funds and private individuals, it is the largest financial market in the world averaging a daily turnover of over $1 trillion dollars, making it a diverse and exciting market. It is a 24-hour market enabling it to accommodate constant changing world currency exchange rates . According to New York time, trading begins at 2.15pm on Sunday in Sydney and Singapore and progresses through to Tokyo at 7pm, London at 2am and reaches New York at 8am. This leaves investors free to respond to global political, economic and social events when they take place, day or night.
Unlike trading on the stock market, the forex market is not conducted by a central exchange, but on the “interbank” market, which is thought of as an OTC (over the counter) market. Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centres means that the forex market is a 24-hour market.
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