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Fundamentals of the United States Dollar (USD)

The safe-haven currency, the United States dollar, known under the ISO symbol of USD or nicknames such as dollar and greenback, has enjoyed a prestigious position as the leading global currency for many years now. Although now the most traded currency worldwide, the USD only took over the throne from the GBP in the late 1800s, that is the early 1900s, which compared with the country’s inception on July 4, 1776, is in fact a rather short period. The USD has experienced times of crisis in the past, and especially now, amid the COVID-19 pandemic, the questions regarding the currency’s strength arise. Surrounded by a plethora of news, which keeps coming out daily, and the US institutions issuing statements in lieu of the current state of affairs, the USD once again defends its long-held unique status among the world currencies.

History of USD 

Before the late 1800s, the British conquest of half of the world helped establish their dominance, rendering the GBP the strongest currency for a period spanning a couple of hundred years. The recognition of the new standard, that is the view of the USD as the new currency of value, resulted primarily from the country’s strong economy and functioning government. Consequently, this new market became also the biggest market in the world with the USD growing to be the most desired currency worldwide.

Now bearing the title of the world’s reserve currency, the USD is the currency of choice whenever foreign governments desire to hold onto their money. As they prefer not to keep these funds in their own currencies, they rely on such diversification mostly due to the need to increase the level of safety. The need for such an approach is most prominent in a small country with an unstable government experiencing numerous ups and downs. If a country keeps all the wealth in their own currency, they risk endangering their financial stability in times of instability or crises, which is why other countries’ safe currencies are employed.

History keeps records of such cases where a country put practically all their eggs into one basket, in a manner of speaking, leaving the country in utter chaos. The notorious example of Zimbabwe, which kept printing more money to the point where it became entirely worthless, should serve as a 30-year-old example of why countries prefer to keep their reserves in more stable currencies such as the USD. The United States’ currency is the standard nowadays which is why many countries across the globe prefer this currency over the others.

The many stories discussing, for example, China buying the US government’s debt are actually the stories of how foreign money is invested in the USD. Even the currency’s value decline due to China’s massive spending involving hundreds of billions of dollars upon their preparations for the Olympics could not shake the USD’s long-term stability. Amid the booming of the world economy, feeling afraid of how this prolonged decline of the USD could impact their reserves, other countries finally decided against keeping their wealth in this currency. The news started to circulate, the tension just kept building up, and the financial collapse hit in the middle of these speculations. Nonetheless, all other currencies except for the USD and JPY fell in value. The event proves the point that the USD is an exceptional currency with the best track record and a strong economy to back it up.

Each time other countries, aside from the United States, have some additional reserves, they often choose to buy the USD, which is generally bullish for this currency. However, whenever countries undergo challenging periods, they may typically decide to sell a portion of their USD holdings which has a negative impact on the currency. Generally looking at the connection between the USD and other currencies, most currencies have historically been pegged to the dollar at some point, especially around WWII and after.

Another important fact concerning the USD is that almost all commodities are generally traded in this currency. Should you, therefore, wish to purchase oil, you would have to do it in the USD. In case you have some other currency at your disposal, such as the EUR, you would then exchange it into the USD to proceed with the purchase. This connection is really significant which is why this topic will be thoroughly discussed later in the text.

With regard to US institutions governing the matters vis-à-vis the USD, the US Treasury Department, which is part of the US government, bears the responsibility for the supply of the money, while the Federal Open Market Committee (FOMC), a partly government agency, handles the related policies. These are two main bodies that control the money in the United States and whose responsibilities will be further discussed in another section below.

The Gold Standard

The US government was the first one to leave the gold standard back in the 1930s, which basically refers to the idea that a country had to have a hard asset to back up the money it wanted to print. Prior to the onset of the new dollar era, the United States would print the gold, silver, and bronze dollars. Back in the days where this monetary system was followed, the value of the dollar derived from the commodity, not the government. This further means that the same quantity of gold had an equal price across different countries, so the money had equal value worldwide regardless of the printing design.

With the shift toward the use of paper money in the late 1600s, the US government still followed the same principle of hard assets providing the money’s value, which gave birth to the above-mentioned gold and silver notes. While these old notes are still available for online purchase nowadays, we cannot now go into any bank and exchange such a gold note of 100 dollars for the equal worth of gold as was possible before. The price of the USD was, hence, entirely attached to the price of the hard assets, and this is how worthless paper actually acquired the value of real gold and silver.

The previously mentioned FOMC was formed in 1933 when some of the United States’ best bankers gathered in private at which point the country decided upon letting go of the rule that prohibited countries from printing as much money as they wanted. Although this country was the first to move towards another monetary policy, which caused great turmoil around the world, all other countries moved along with applying the same changes. By the late 60s, the entire world had already adopted the same strategy.

The new system implied that countries no longer had to store all the gold and the silver, i.e. the hard assets, in order for them to be able to print money, called the money supply. The money supply is basically the total amount of one country’s money in circulation. This however does not only refer to the printed money as only 6% of the entire USD has been printed on bills. The remainder actually pertains to digital numbers, such as the money in an individual’s bank account. The phenomenon is similar to that of cryptocurrencies, and some companies may even allow you to exchange these numbers in a ledger for the USD. As money is generally digital, if the bank does have enough money at the time of the desired withdrawal, you will not be able to take out the money, or the bills, that you requested.

The US Agencies 

As discussed before, the US Treasury is tasked with deciding on how much money is going to be printed, controlling the money supply. The FOMC, on the other hand, is responsible for monetary policy, which further implies that they control interest rates, bailouts, and other important segments related to the country’s finances.

The United States comprises 12 sections governed by 12 different bank presidents charged with submitting individual reports concerning their districts. The reports are shared and discussed upon meeting with other committee members going through the information prior to making a vote. The voting is conducted so that it allows only five regional bank presidents to get a vote, rotating the votes in a manner that prevents the past year’s vote from coming up again. Out of the 12 members, the 7 remaining ones actually come from the FOMC. They alternate meetings between six and eight weeks apart, and the head of the committee that is the Chair of the Federal Reserve (the Fed) has the tie-breaking vote. 

FOMC Procedures

The current Chair of the Federal Reserve of the United States is Jerome Powell, who spent most of his time in the Banking Industry. Due to his banking background, he differs from the previous scholars and economists who used to perform this function in the past. The current Chair’s aforementioned experiences make him appear to truly understand more about banks than the previously chosen individuals, who are appointed every four-six years. 

Every other meeting involves the Chair holding a press conference, where he reads a prepared statement and conducts the Q&A session. In these meetings, the Chairs would typically share a lot of important information, which has historically been likely to usurp the market’s stability. The market would suddenly become quite volatile and traders would react to these events. The former Chair of the Federal Reserve of the United States, Alan Greenspan, was famous for the statement about the market he gave in the 90s that resulted in quite a turmoil. The market went down by 10% the same day only to go up and double after that, making the market even more unstable. These figures appear to exercise more control in their public statements nowadays, although these events have been said to still have an effect on traders and the market.

Key US Reports

The key documents providing the greatest insight into the state of the USD and related matters include the following five reports: GDP, employment, producer and consumer price index, retail sales, and trade deficit reports. 

The GDP or the Gross Domestic Product report provides information on this important economic indicator that signals the condition of the overall economy of the United States. Providing insight into the country’s productivity, the quarterly report is said to have a particular impact on traders and their decision-making. The United States, in fact, issues three such GDP reports: the initial report that comes out approximately three weeks upon the end of the quarter (e.g. if the quarter ends toward the second part of the month, the initial report will probably come out around the 20th of the following month); the second report issued a month later that will contain some actual numbers based on the revision of the previous data; and, the final number that comes out three months upon the quarter ending. Among the three, the least attention will be directed towards the final reports, which appear to only hold relevance for the record books, whereas the first one will generate the most interest. As the initial report of the quarter, it gives important clues to traders, which is why, for example, every January 20, April 20, July 20, etc. will be important dates that should be part of the traders’ calendars. 

Non-farm Payroll measures employment or the number of people employed in the previous month and many traders rely on this information due to its relevance. The report typically comes out the first Friday each month and entails an extremely important indicator of consumer spending. Should the Friday fall on the first of the month, the issuance will be postponed to the following Friday of the month. When the results exceed expectations or predictions, they are considered to be positive (bullish) for the USD, while the opposite scenario is considered as negative (bearish) for the currency in question. Some currency traders claim that the Non-farm Payroll report is one of the best reports to trade.

The monthly producer and consumer price index (PPI and CPI) are important indicators measuring the economy’s performance. PPI is an important piece of data that signals future expected inflation, any positive change in this index entails the rise of prices as well as the possibility to save money and earn interest. The PPI is said to have little effect on the USD per se, but its correlation with the CPI is found to be extremely important by some astute forex traders. The CPI, unlike the PPI, provides insight into current growth and inflation levels. What traders can generate from this information is an understanding of the impact of inflation on the USD. For example, the first half of 2018 recorded a rise in inflation which correlated with the increase in the US Dollar Index (DXY).

The retail sales report notes the changes in sales as an important indicator of consumer spending, which is said to account for approximately 70% of economic growth in general. Traders keen on trading the news find this information important, especially in the light of the recent pandemic. Similar to the Non-farm Payroll report, a positive retail sales reading generally proves to be bullish for the USD, whereas a low reading is seen as bearish.

The trade deficit, the last report, is considered important due to the fact that during such deficits, the USD is generally noted to weaken. As currencies are susceptible to change because of a number of factors (e.g. economic growth, interest rates, inflation, and government policies), trade deficit should be perceived as one of the determinants. Generally, the trade deficit is considered to have a negative impact on the USD although the currency’s appreciation could stem from other reasons.

Major Currency Pairs

The following seven currency pairs are said to have the greatest volume: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD. The EUR/USD pair is said to hold 37% of all trading volume in the world. While this number can oscillate up and down, this currency pair is in fact the most liquid pair among the seven major ones and is generally considered one of the safer pairs to trade. Traders who are invested in trading big news events are the ones that should be particularly drawn towards the most liquid currency pairs since these entail tighter spreads and less slippage. What is more, traders interested in trading the Non-farm Payrolls report are advised to give this currency pair a try because, while it cannot grant 100% success, it does alleviate some of the challenges concerning trading currencies. 

With a total of 10% of the entire trading volume, USD/JPY accompanies the previously discussed currency pair to hold almost half of the world’s trading, making these two a focus of many traders’ attention. As the USD is the most popular currency in the world, every trade involving this currency should entail great trading volume even with pairs such as NZD/USD.

USD/Gold Correlation

The negative correlation between the USD and gold is considered as one of the most important topics regarding this currency. These correlations can at times increase or decrease in strength, but from the perspective of history, the USD has an 80% negative correlation with the price of gold. This further implies that once the price of the USD appreciates, the gold’s price should plummet, and vice versa, which can be seen from the chart below (spot gold is red while DXY is blue). Although at one point both prices started moving in the same direction, these occurrences are very short-lived because the standard negative USD-gold correlation is of a long-term nature and eventually everything goes back to its place. The strongest correlation, and the most prominent one, is the one that the USD has with the price of gold. It is an indicator that as soon as the price of one goes up, the price of the other will start moving in the opposite direction. Naturally, traders can find exceptions and this cannot be perceived as a guarantee, but this correlation has been present for many years.

Trading USD

As one of the most liquid currencies worldwide, the USD allows for traders peace of mind when trading the related currency pairs. The only exception to this rule is when trading big news events or if traders are expecting some important move in the market. The USD is generally perceived as the safest currency to trend with the tightest spreads and the least amount of slippage, although some traders avoid it due to the big banks’ attention, involvement, and impact on this currency and, hence, traders.

Upon the economic crisis of 2008, the FOMC was the first central bank to raise interest rates, and years passed until others started to do the same. The USD is certainly not the currency with the highest interest rates in the world at the moment, but we have witnessed how they kept soaring at a dramatic pace at a few points in the past. The reason why this happens lies in the central bankers’ desire to keep inflation under control. Therefore, whenever the economy is improving, the interest rates are increasing.

The currency market implies the flight to safety on one hand and the flight to risk on the other, which is why we have money flowing either in or out of the country. Therefore we can conclude that the reason behind the FOMC’s aggressive rise in interest rates is the strength of the US economy. As it is the largest economy in the world, it does impact the rest of the world. Hence, when the US economy is doing well, so are the other countries.

Whenever money is on the lookout for investment, it will direct itself towards risk, which entails locations such as China, Vietnam, and South America, heading towards the places where the greatest return on money can be found. The FOMC kept increasing the interest rates, but this did not always entail a strong US dollar since the rest of the world was in fact doing better at the time. Inflation was kept under control since 2008 and the world seemed stable until the onset of the COVID-19 pandemic.

An important fact regarding the USD concerns trade deficits owing to the fact that the United States imports increasingly more than it exports, in particular with countries such as China and Japan. These trade deficits are a long-term negative for the currency because the individuals living in the United States and buying foreign goods keep seeding the money out of the country, and it is these other countries where this money is reinvested. The opposite scenario, where the United States could do more exports and the money would come into the country, as a result, would create a trade surplus. The country’s age-old tendency has been one of the popular topics highlighted by US politicians as a long-term negative on the currency.

Economic activities always affect the USD price, so if the United States is undergoing a challenging period unlike other countries, the US economy can be expected to keep struggling. On the contrary, should the rest of the world be experiencing economic struggles, the US economy would probably be doing well. Nevertheless, in order to trade the USD successfully, traders are always advised to do extensive research and monitor the external factors surrounding the currency market. 

Impact of COVID-19

The pandemic has taken the entire world by surprise, also shaking the United States economy, leaving 22 million Americans unemployed. The worldwide economic shock has revealed a silver lining for the USD as it has led to a number of investors selling riskier assets (e.g. stocks and bonds) and taking cash as a form of safety. The currencies which were highly exposed to global trade suffered depreciation as they typically sell-off in the face of economic deterioration, but the US dollar again emerged as the currency of choice in times of crisis. As investors always flee to safe-haven currencies in such unpredictable times and as the COVID-19 pandemic is driving the global economy into recession, the demand for the USD rose to the extent that the US Federal Reserve has to set up new swap lines in order to be able to lend money to the central banks of other currencies. The USD is currently seen as the strongest currency probably due to the country’s stable and safe economy. However, such strong demand can even exacerbate the current situation which pushed the Federal Reserve to protect the currency from shortages. 

Although the USD did not appreciate more than in 2007, the currency’s index value did approach near record highs. So far, the USD has slightly leveled, still maintaining an edge similar to many major currencies (e.g. EUR or JPY). Nonetheless, the current preference of the USD and its strength seem to be calling for an increase in international collaboration. Now, as the Federal Reserve is yet again pumping the currency into the world market, the trend may have serious implications for other economies. For example, after the 2008 crisis, the cost of export created by a soaring JPY left Japan worse off than some countries directly affected by the financial tumult, starting with the United States itself.

Business owners across the world understand that should the pandemic continue, they will require significant capital reserves to withstand the blows of the economic contraction. The spread of the virus certainly motivated some large currency moves as well and, although similar tendencies have been recorded in the past, the pandemic does make this situation one of a kind. The quick-paced forex dynamics and capital outflows from emerging markets appear to be much more prominent.

The state of equities at the moment is certainly interesting as we can see from the chart below. The same contrasting behavior between DXY and SPX500 was noticeable before as well as during the financial crash of 2007. March was another time in history when a significant drop in equities was quite prominent only to go up recently.

Interest rates in the United States of America have leveled after the brief increase in the past year and as of March equal 0.25%, unlike the values proposed by some other central banks of the world. The current interest rate is practically the same as it was in the post-crisis period of 2008, where it maintained the same 0.25% until the beginning of 2015. Interest rates across the world mimic the same decline as that of the FOMC. However, some other central banks, e.g. the Central Bank of the Russian Federation (CBR) and People’s Bank of China (PBOC) keep their interest rates above 4%.

China’s and Russia’s attitude towards the USD has kept economy-related media and various markets’ participants quite entertained in the past few years, especially in relation to gold and surrounding events. The so-called de-dollarization appears to be backed up by previous political altercations between China and Russia on one hand and the United States on the other. These long-term geopolitical rivals were found in the middle of a currency war where the two countries appear to be fighting against the global hegemony of the USD. 

Despite countries leaving the gold rule, this pre-pandemic gold spree appeared strange in this digital era. However, the central bank of Russia suspended buying of gold on the domestic market which has been explained by the attempt to strengthen the local currency aligning with lower oil prices and the spread of COVID-19. Quite interestingly, Russia is claimed to have exported more gold than gas in the second quarter of the current year for the first time in approximately the past 30 years. Analysts explain the entire situation as a mechanism that stops Russia’s purchases of foreign currency and gold when the prices of oil fall below $42 a barrel. With gold prices reaching all-time highs beginning of August 2020, many major Chinese banks have already taken measures to stop customers from purchasing gold and other precious metal-related products through them.

Gold prices have gone up and down in the past, so the increase from the beginning of 2020 can be attributed to the onset of the COVID-19 pandemic as well as part of its natural longer upward trend. The current price exceeds that of the financial crisis of 2007 by far and the precious metals appear to be moving even higher, supporting the expectations of the US inflation increase. 

The FOMC maintains a positive outlook on the future, assessing the May employment rise in a number of sectors, employees’ return to work, and the reopening of many businesses. Some analysts even look back at the times of the previous financial crisis where many feared inflation, highlighting the importance of preserving a more enthusiastic perspective of the future of the USD and the US market.

The USD has once again been proved to be the reserve currency of most countries across the world with more than $1.8 trillion of Federal Reserve notes in circulation. This de facto global currency appears to be positioned well for future trades despite the severity of the global viral threat. The United States’ official currency is currently largely outside the country’s borders, yet it may be difficult to foresee any other currency taking over the USD prominence in the near future.

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Forex Assets

The Fundamentals of the Swiss Franc (CHF)

The Swiss Franc, otherwise known under the code CHF, is the official currency of Switzerland and Liechtenstein as well as legal tender in Italy. Since its creation in 1850, the CHF has historically been marked by Switzerland’s neutral stance in war situations, making people around the world build trust in Swiss banking institutions. People’s tendency and willingness to keep their money in Switzerland appears to stem from the country’s image of being impartial and honorable under all circumstances, making the CHF and Swiss banks unique. For a period spanning across several centuries, Swiss banking institutions exuded the air of safety and fairness. Their firm approach of withholding information from government entities to preserve anonymity long supported the impression that they would leave on others, which unfortunately started to wither in the past few years.

The long-held belief in the credibility of Swiss institutions and their distinctive conduct was undermined directly once the news of sharing information with US and German governments broke out, consequently affecting their safe-haven status in the world of banking. Apart from the changes in Swiss banking systems and the effects they have had on the way they are perceived by others, it is interesting to note how Switzerland is quite a small country. Along with its size, the country’s GDP is thus also rather small, especially compared to some other countries. Despite these facts, the official currency of Switzerland unusually ranks fifth among all major currencies, which is directly proportionate to the quantity of money flowing into the country. The CHF, which is also called frank or swissie, is currently believed to be the most tightly linked to the price of gold among all other currencies. The history of Switzerland and the present state of the currency both point towards uniqueness and distinctiveness in comparison to other currencies and their respective countries to this day.

The Swiss National Bank

The Swiss National Bank, Switzerland’s central bank, was established in 1907. Unlike other central banks in the world, the Swiss National Bank (SNB) is an aktiengesellschaft (AG) that stands for a public limited company. This further implies that the SNB is a for-profit type of institution, thus resembling J.P. Morgan, Credit Suisse, or Deutsche Bank. Despite its uniqueness, the SNB still functions as a regular bank, i.e. it holds deposits, makes loans, etc. Aside from its standard banking-related tasks, the government of Switzerland additionally placed responsibility for the country’s monetary policy on the SNB. The bank is also in charge of Swiss gold reserves, which has fueled conspiracy theories about large, hidden vaults under the city of Bern that supposedly store immense quantities of gold.

The unproven allegations that kept many interested in the pursuit of confirmation and discovery were not confirmed by the bank which further kept the veil of mystery regarding this topic. This massive interest led to a breakthrough approximately 12 years ago when a German journalist managed to get in touch with an individual who worked in one of the vaults. The worker disclosed confidential information concerning the location of the vaults and the amount of gold to a German newspaper, yet the Swiss government refuted all claims. The Swiss National Bank is, however, still believed to hold massive gold deposits as a central bank responsible for the county’s gold reserves.

What is more, since the SNB is a for-profit independent bank, it achieves its aims of making a profit through the Bank Council, with six members appointed by the government and five by the shareholders. Regardless of the bank comprising the minority of the council, it is still tasked with managing the economic policy. The SNB has a dual mandate, consisting of price stability (i.e. regulating inflation) and economic growth. It is also one of the central banks to meet the least frequently to discuss Swiss monetary policy. The monetary changes, which include the LIBOR (Swiss interest rates), are announced only once every quarter as opposed to many other countries. The Swiss National Bank is led by Mr. Thomas J. Jordan, appointed in 2012 as the bank’s Chairman. One of his greatest contributions was the essay he wrote on the possible repercussions of abandoning the official currency in favor of the EUR amidst the changes that were taking place in European countries in the 90s. This paper contained a detailed assessment of the future, involving monetary policy and housing markets collapse, that would come true a decade later. 

Economic Reports

The key economic reports in Switzerland are GDP, employment level, retail sales, CPI and PPI, and consumption indicator. Nevertheless, it appears that overall economic numbers do not impact the CHF substantially unlike some other currencies. 

Most Traded Pairs

The USD/CHF and EUR/CHF are the most liquid crosses, followed by the GBP/CHF and CHF/JPY currency pairs. Professional traders advise caution with all other CHF-based crosses due to the fact that trading outside these four pairs tends to be rather light and illiquid. Currency pairs such as AUD/CHF typically involve many wide spreads and erratic movements and such crosses are quite susceptible to the impact of news events. Therefore, in order to avoid extreme volatility and gain the most volume, the previously mentioned pairs may be the best option for trading in the currency market.

CHF-based Crosses Compared

Key Correlations

Gold

Switzerland held to the gold standard for the longest period of time among all other countries, even after most of them abandoned it in the 1970s. The fact that stayed on the gold standard implies that they maintained equal amounts of gold to back up their currency. This lasted until the 90s when they cut the gold reserves by 50%, so each new banknote they printed would be supported by a half of its value in gold reserves. This ratio was further reduced later, but the CHF is still tied to the price of gold. Even though this relationship has weakened over time, the CHF typically rises when gold does and vice versa.

XAU/CHF vs. USD/CHF

EUR/CHF

In the midst of the EUR collapse in 2011, with many European countries undergoing major difficulties, no one knew whether a stronger economy could bail them out or whether the ECM could offer any support. Looking for more stability in the crisis, many wealthy individuals decided to move their finances to Switzerland. This subsequently caused the EUR to depreciate and the CHF to appreciate, and the pair suddenly moved from 1.50 to 1.04. The price of Switzerland’s official currency quickly climbed sharply and as they are a large exporting economy with most of their exporting done with Europe, the price of their products steeply increased.

The SNB decided to take action and buy great amounts of currency once EUR/CHF reached the above-mentioned low so as to return the value to 1.20. The pair went up in a matter of a few hours and after 1600 pips turned out to be one of the greatest market moves in the currency market. The close relationship between the two currencies imitates a currency peg, which entails that a currency pegged to another cannot trade freely anymore. Due to this intense resemblance, some professional traders chose to focus on other EUR-based pairs as they generally involve less slippage and tighter spreads. Nowadays, traders are keen on trading USD/CHF and EUR/USD owing to these crosses’ high (95%) negative correlation.

EUR/CHF

Trading the CHF

The CHF used to be one of the top three most traded currencies, yet due to the correlations with the EUR and gold, it has lost its independence in a way. Its safety status diminished greatly after Switzerland abandoned the gold standard and the banking institutions started to give out confidential information. Switzerland has maintained its interest rate at -0.75 since 2015, which is one of the lowest rates among all central banks. Inflation amounted to 0.57% in 2019 and was projected to reach 0.64% in 2020. The last report the SNB issued in June of 2020 highlighted a sharp decline in economic activity and inflation as a result of the COVID-19 pandemic. Although they state that current inflation and growth estimates are challenged by unusually high uncertainty, they are generally assumed to pick up in the following year. Due to the nature of the country’s economy and exportation, the CHF carries hardly any difficulties with a trade deficit.

The country’s overall economic activity depends on GDP, and as the decline in Swiss GDP was already noticeable in the first quarter of the year, with April witnessing one of the lowest points in economic activity, the SNB projects a stronger GDP declined in the second quarter of this year. With regard to news events, the CHF’s correlation with the EUR makes it more susceptible to whatever is happening with the EUR. Therefore, if the ECB decided to reduce interest rates, the effects would likely be felt with the CHF as well. The SNB does not necessarily need to take the same action as the ECB, as it has not done in the past either, yet the CHF and the EUR have exhibited similar behavior for many years now. As discussed before, many traders decide to trade other EUR pairs rather than EUR/CHF due to this correlation.

Central Banks’ Interest Rates

Latest Events

The CHF has been moving in various directions lately, which has been largely boosted by the higher EUR. A recent downtrend has turned into a rather weak uptrend supported that can be attributed to the EUR. The EUR appears to have been much better than the CHF lately, pulling it upward. This week, both the EUR and the CHF seem to be in the neutral territory in comparison to other major currencies. Generally, as there is a little divergence between the EUR and the CHF, other crosses involving the former may again be a better choice. The end of August is typically a quiet period in the forex market, so trading currencies can potentially be a little sluggish as well. In terms of economic reports, KOF economic barometer, which many participants in the financial markets seem to be interested in, will come out on August 28, providing information on the Swiss GDP. The CHF is generally directed towards a weaker value due to the Swiss National Bank’s desire to boost inflation.

Although it is one of the strongest currencies in the world, trading the CHF is still subject to susceptibility to some other factors such as the EUR, gold, and, currently, the coronavirus pandemic. Nonetheless, due to its strong economy and the unique central bank the currency rests on, the CHF is believed to remain one of the safer investment options. Switzerland’s safe-haven currency was estimated to be the second best-performing currency of 2020.

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Forex Fundamental Analysis

Does The ‘Import Prices’ News Announcements Impact The Forex Price Charts?

Introduction

Import and exports make up a country’s trade balance that primarily drives currency value and economic growth. The two-way feedback between imports and exchange rates is critical to understand and how the trade balance affects currency value. Understanding changes in import prices can help us deepen our understanding of macroeconomic fundamentals of every country.

What is Import Prices?

Import prices are the cost at which foreign goods are purchased in the international market. Import prices are measured through import price indexes. Import price indexes measure the change in prices paid for goods imported to the domestic country. The import price index figures for a reference period relate to the prices of goods that have come into the country during the period.

Import prices are essential to a country’s trade balance. A country’s trade balance is the difference between its total exports and imports and is an economy’s major composition.

How can the Import Prices numbers be used for analysis?

The international market always tends to stay in an equilibrium of currencies. When a country’s currency is flooded into the forex market, its relative value falls against other currencies. On the contrary, when a particular currency leaves the international market and goes into the country, the deficit increases its value against other currencies. Hence, excess reduces value, and scarcity increases value.

In this sense, when a country imports goods and services, it does so by paying out or sending out its domestic currency into the international market. When a country exports a good or service, it sends out the product in return for dollars coming into the country. Hence, overall the total worth of exports and imports should be balanced to maintain the currency’s current value.

When a country imports more than it exports, it faces a trade deficit, and as a result, its currency value falls relative to other currencies. When imports exceed exports, it means the country is a net consumer of goods and services in the global economy. It is negatively contributing to global economic growth. When a country exports more than it imports, it faces a trade surplus, and as a result, its currency rises relative to others. When a country is a net exporter or provider, it is contributing positively to global economic growth.

In general, countries prefer to maintain a trade surplus, but may intentionally maintain a trade deficit by importing, to increase their exports and overall economic growth in the future. Countries in today’s modern world have increasingly become dependent on international trade for both imports and exports.

Countries that do not have a competitive edge in specific sectors prefer to import goods and services from other corners of the world where they may be more efficiently produced and are cheaper. Businesses rely on importing raw materials or intermediate goods for producing finished goods and services, or even consumption.

A strong currency will favor imports as more goods can be procured for a unit of currency. Prolonged deficits (imports exceeding exports) devaluate the currency, which is not suitable for the economy. Hence, countries’ central authorities closely monitor the import and export price changes to draw out policies or reforms if needed to ensure a trade balance. In a crude sense, a country’s exports are its income, and imports are its expense. Increasing imports and declining exports ultimately drive a country into a debt trap.

Import prices are useful for negotiating future trade contracts, tracing global price trends for certain goods and services, predicting future prices, and domestic inflation. It is also used to deflate trade statistics published by the government. Import price also helps the central authorities to decide which and how much of a fiscal or monetary lever is to be used to manage exchange rates.

Import prices are especially valued in the bond markets because of its direct impact. As importing prices become too high, it deteriorates the importing company’s profit margin, ultimately decreasing corresponding bond prices. Hence, bond prices decrease when import prices substantially increase. On the other hand, when import prices decrease, the profit margin for companies increases, and correspondingly the bond prices also rise, seeing the increased margin.

Impact on Currency

The currency markets are always focused on macroeconomic indicators and do not focus on indicators that focus on specific parts of the economy. However, import prices affect trade balance, bond markets, and even stock markets. The overall net import and export figures and trade balance reports constitute more precedence than the individual import prices report for the currency markets. Hence, it is a low-impact indicator in the currency markets and can be overlooked for other macroeconomic indicators.

On an absolute basis, significant increases in import prices for prolonged periods, deteriorate currency, and economic growth. In practice, multiple forces act for and against such figures, and import prices alone are insufficient to determine currency’s future direction.

Economic Reports

In the United States, the Bureau of Labor Statistics publishes monthly import prices as part of its “Import/Export Indexes (MXP).” It is released every month around the second week for the previous month on its official website.

Sources of Import Prices

The Bureau of Labor Statistics Import/Export Indexes (MXP) is primarily used. It is also categorized into subtables by End-Use, NAICS (North American Industry Classification System), Harmonized System, and Origin. Consolidated Import prices for most countries is available on Trading Economics. The World Bank also maintains international trade data in terms of import value and export value indexes.

Import Prices – Effect on Price Charts

Import Prices is an important element in understanding the trade balance of an economy. However, it alone cannot affect the economic condition of a nation. It is combined with the Export Prices, and the difference between the two is what makes it vital.

Coming to the currency market, the Import Prices report mildly affects the volatility of a currency. If immediate volatility on the time of release is not observed, it could be reflected in the short term.

Import Prices Report

The below report represents the Import Prices of the US for the month of June. According to the data released on July 15, the Import Prices increased by 1.4% month-on-month, after a decline of 0.8% the previous month. Also, it beat the forecasted value of positive 1.0%.

Historical Impact Prices Report

Impact Level

The US Import Prices released by the US Department of Labor has a moderate impact on the currency market (USD).

USDJPY – Before the Announcement

Below is the price chart of USDJPY on the 15mins time frame. Before the report was released, the market was in a strong downtrend representing USD weakness.

USDJPY – Before the Announcement

When the news was released during the open if the New York session, the trading volume considerably increased, and the price continued to move south. However, later in the session, the prices reversed in favor of USD. This indicates that the market did have an impact on the report.

USDCHF – Before the Announcement

Before the news announcement, the volatility of the market was feeble. The price which was inclined down initially, but had begun to move switch direction during the release of the news.

USDCHF – After the Announcement

When the Import Prices news report was announced, the volatility was moderate in the beginning but reduced later in the day. The price which was showing bullishness prior to the news continued with the same sentiment. Thus, traders can follow their strategy without any hesitation as the news barely induce high volatility.

AUDUSD – Before the Announcement

Before the announcement of the report, the market was in an evident uptrend making higher highs.

AUDUSD – After the Announcement

Right when the report was announced and the North American session began, the market reversed direction from an uptrend to a downtrend. However, the price failed to make a higher high. The volatility increased significantly, which can be seen from the volume indicator.

The Import Prices is an essential indicator in as it is a factor of calculation for fundamental drivers. As we saw, even though this indicator did not really bring in volatility in the market, it indirectly does significantly affect the currency prices when combined with other drivers. Cheers!

Categories
Forex Fundamental Analysis

What Should You Know About ‘Export Prices’ & Its Relative Impact On The Forex Market

Introduction

Exports and Imports are vital components of a country’s Trade Balance that directly affects currency value. Careful balancing of export and import prices is necessary for maintaining currency value. Understanding how export prices affect the overall trades, domestic businesses, and ultimately currency value can help us build a more accurate fundamental analysis.

What are Export Prices?

Export prices are the selling price on the products and services to be sold in the international market. It is the price of goods and services that are domestically produced and sold to foreign countries. Hence, it is the prices fixed on goods and services which is intended for sale by the exporter in the overseas market.

In the United States, the Export prices are measured as part of the “U.S. Import and Export Price Index.” Export price and Import price both together form a sort of “net” price that helps us understand whether we are exporting more and gaining, or importing more and losing.

How can the Export Prices numbers be used for analysis?

In today’s modern world, many nations have opened themselves up for international trade. It is quite common for foreign brands to compete with local brands in many countries. Globalization has led to rapid growth for the global economy. Exports and Imports are two essential elements of a country’s trade balance. Imbalance in trade creates a deficit or surplus that directly affects the country’s currency.

Increased exports and reduced imports mean more goods and services go out of the country, and currency comes in. When currency comes in, the foreign demand for currency increases, and thereby currency value goes up. If exports bring more currency into the country than imports send out, the country experiences a trade surplus, which is good for the economy and currency.

Increased import over export indicates more dollars are spent and go out in importing products and services than dollars coming in for the goods sent out. When the international market is flooded with a currency due to increased imports, its currency value falls against other currencies. In such a situation, a country is said to have a trade deficit. Export prices can rise for the following reasons:

Increased production cost

As the manufacturing or cost of the raw materials increases, it eats away the company’s profit margin. To avoid this, companies may translate these increased production costs to the end consumer by pricing their goods higher.

As companies not only have to compete with fellow local businesses, they need to compete with companies from other countries. An increase in prices through production cost inflation may put the country at a disadvantage and lose sales in the international market. Hence, even though export prices increased, the sales volume will decrease negating the effect. It generally does not work in favor of the country and its currency.

Increased demand

As demand for a particular good or service increases, the company may raise its prices to compensate for the limited supply. Price increase as a result of increased demand is always beneficial for the company, country, and currency. Export and import prices are used for many purposes, and some of which are:

  • Based on changes in export and import prices, we can predict future prices and domestic inflation.
  • We can evaluate currency values and exchange rates based on overall exports and imports for a given pair of countries.
  • It can be used as a reference for setting up other trade agreements and price levels.
  • It can also be used for identifying global price trends for any specific product or service.
  • They can be used to deflate or devaluate trade statistics.

Export prices are specifically more critical for developing economies, as through exports, they primarily achieve their growth. Export-led growth has benefitted developing economies to create wealth and developed countries to get goods at much lower prices in the international market.

Change in currency value also affects export and import prices. Weak domestic currency brings in more currency during exports while making it harder to import as they become relatively more expensive. A strong currency hurts exporters while it favors imports as more goods can be purchased per unit of currency.

Hence, we observe countries undergo “trade wars.” Trade war means countries intentionally devalue their currencies during exports and peg it higher during imports in their favor. Such tactics are regularly used by China, and seeing these other countries also do the same. Competitively devaluating or valuating domestic currency higher to make trades favorable to their countries is referred to as a Trade war. Hence, any increase in export price should solely happen through an increase in demand, as that is the only way the economy benefits in the long run.

Impact on Currency

Export prices alone do not provide us with a complete picture of a country’s trade balance. The overall export minus import price is what determines the overall currency value. Hence, for currency markets, the export prices alone do not provide the necessary insight. Therefore, it is a low impact indicator. But on an absolute basis, an increase in export prices is good for the economy and the currency and vice-versa.

Economic Reports

In the United States, the Bureau of Labor Statistics (BLS) publishes monthly export prices as part of its “Import/Export Price Indexes” at 8:30 AM around the middle of the month. It is reported in percentage changes compared to the previous month and is also reported by categorizing based on end-use.

Sources of Export Prices

We can find the Export Price as part of the Import/Export Price Indexes and end-use versions. We can find consolidated statistics on export prices for most countries on Trading Economics.

Export Prices – Impact Due To News Release

Export prices is an important fundamental indicator in analyzing other economic drivers. When it is combined with the Import Prices, the trade balance is obtained, which plays a vital role in the foreign exchange market. The trade balance is also a fundamental indicator that heavily impacts the currency of a country. Thus, traders always keep an eye on the release of the trade balance report.

Coming to Export Prices, it alone does not induce much volatility relative to that of the trade balance. However, since the trade balance is dependent on the Export Prices and Import Prices, traders do keep a watch on these data releases to get insights on the overall output of the trade balance.

Export Prices Report

Before is the latest report on Export Prices, which came out to be 1.4%. The Export Prices were expected to rise by 0.8%, but the actual number beat the forecast.

USDCAD – Before the Announcement

Before the announcement of the Export Prices data for the month of June, we can see that the market was in a fresh downtrend making news lows every step of the way.

USDCAD – After the Announcement

The news was published during the open of the New York session. It is seen that, right on the announcement of the data, the USD prices collapsed against the Canadian dollar. With the release of the report and the open of the New New York market, the market volatility was boosted.

In this case, we see that the market followed the direction of the overall trend. Thus, traders can take advantage of the volatility due to news and market open and trade based on their analysis. However, they should ensure that the report is within the normal range and not an outlier. During abnormal values, a trader may better off stay away from the related currency, and its pairs.

NZDUSD – Before the Announcement

A day before the release of the Export Prices report, the market was in an uptrend, signifying NZD strength and USD weakness.

NZDUSD – After the Announcement

Once the news was out, the volatility of the market remained the same, despite the open of the US market. This clearly implies that NZDUSD was stayed non-impacted with the Export Prices report. However, in the subsequent day, the market reversed its direction from an uptrend to a downtrend.

GBPUSD – Before the Announcement

On the day of the announcement of the data, the market was in a strong bullish movement. And the time of release, the price was trading right at the supply area.

GBPUSD – After the Announcement

Once the board released the report, the price aggressively turned around and shot south. The reason for the down move can be accounted for the supply region, while the increased volatility could be due to the news and the open of the North American markets. Cheers!

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Forex Course

6. Different Ways Of Trading The Forex Market

Introduction

Forex is a market to trade foreign currencies. It is traded 24 hours electronically over-the-counter, meaning the transactions are performed over the networks around the world. One way to trade the forex market is for one party to buy a currency, and the other to sell it. This method is referred to as spot forex trading. Apart from this, there are other ways to trade the Forex market. And in this lesson, we shall discuss these different ways.

Forex market and its types

If we were to consider the primary forex market asset types, we could find four. They are:

Spot Forex Market

Currency Futures

Currency Options

Currency Exchange-traded funds

Now, let us explain the working of each one of them in detail.

Spot Forex Market

As discussed, in the spot forex market, currencies are bought and sold for a short period of time, based on the current market price (CMP). The prices in this market are settled in cash, on the spot, bases on CMP. Hence, the spot market is also called a ‘cash market’ and ‘physical market.’ The settlement of orders in the spot market takes two days, while in the futures market, it takes much longer.

Spot trading is the most popular form of trading where the majority of the retail traders trade on. There is great liquidity in this market, and brokers even offer tight spreads on them. Apart from retail traders, other participants in this market include commercial banks, central banks, arbitrageurs, and speculators.

Currency futures market

In the currency futures market, the buyer buys a contract of one currency by paying another currency. While the seller of the contract holds the opposite obligation. And this obligation is due on the expiration date of the future. The ratio of the currencies is settled in advance between both the parties (the time when the contract is made). The parties make a profit or a loss depending on the difference between the real effective price on the date of expiry and the settled price.

Currency Options

A currency option is a type of options contract that gives the buyer the right, but not the obligation, to buy or sell a currency pair at a given price before a set time of expiry. To get this right, the holder of the option pays a premium to the seller who is known as an option seller.

There are two types of currency options, ‘Call option’ and ‘Put option.’ A call option gives the buyer the right to buy a currency pair at the strike price before the expiry date. A put option gives a buyer the right to sell a currency pair at the strike price before the expiry date. Currency options are a popular way of protecting against loss.

Since the options are a bit complex, let’s understand them with an example. If you believe that the price of the Euro will rise against the US dollar, you can buy a currency call with a strike price of 1.31000 and expiry at the end of the month. If the price of EUR/USD is below 1.31000 on the expiration day, the option expires worthless, and you would lose the premium paid. On the other hand, if EUR/USD increases to 1.50000, you can exercise the option and buy the currency for 1.31000 (At strike price). By doing this, you have generated high returns on your investment by using options.

Currency exchange-traded funds

Back then, Exchange-traded funds (ETFs) were only available for the stock market. But in the present, ETFs have expanded to the Forex market as well.

A currency ETF is a fund that clubs a single or typically a bunch of currency pairs. These funds are managed by financial institutions and are offered to the public for purchase on an exchange board. Hence, one can trade ETFs just like any share on the stock market.

These are the four primary ways of trading the Forex market. Now take the quick quiz below to know if you have understood the above concepts.

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Categories
Crypto Guides

Why Do We Need Cryptocurrencies? What Is Their Purpose?

Introduction

Cryptocurrencies are digital tokens used in the place of conventional fiat currency for the exchange of goods and services. The digital tokens are generated and regulated using encryption techniques called cryptographic hash functions, ensuring security and anonymity.

Why do we need cryptocurrency?

We are living in the digital era, where everything around us is changing swiftly. Not only our phones are smart now, but also our homes. We can speak and see people using video calls at a very cheap rate now. With virtual reality, we can create a different world around us by sitting on a couch. All of these weren’t even possible just a decade ago. But technological innovation has bought us to where we are today. We are amid the fourth industrial revolution today, which fundamentally changes the way we live, work, and relate to each other. Artificial Intelligence, Machine Learning, and Blockchain technologies pave the way for the same. Hence came the age of digital currencies, and they are transforming the way we transact with each other throughout the world.

Let us see in a particular way below on how cryptocurrencies can solve the problems that our traditional fiat currencies cannot solve.

Fraudulent currency

Cryptocurrencies solve the issue of fraudulent currencies. As they are generated and regulated using cryptographic hashing techniques, it is highly impossible to create counterfeit currencies. They are not being minted to create a hard copy of the same type with the same feature. These digital tokens are stored in the blockchain platform, where there is no worry of duplicity.

Double spending

The concept of digital currencies was there even before Bitcoin, but they couldn’t be attained in reality. The obstacle was the double-spending. A digital asset shouldn’t be spent twice to different persons at the same time. Today’s cryptocurrencies operate on blockchain technology. Blockchain technology effectively deals with the double-spending problem as there is a validation procedure involved using a consensus mechanism.

Transferring funds

We can transfer vast amounts of funds to any country around the world in less than 10 minutes. There is no limit to the transaction. The transaction fees are low when we compare with the traditional transaction charges. It takes around 3 to 5 days when we transact using a fiat currency of that size. Taking this much time is not efficient in this age of digital, and cryptocurrencies came to the rescue.

Decentralized network

Cryptocurrencies are generated in a decentralized network without any central bank controlling the system. Since there is no one controlling it, the currency will be stable if the credibility and maintenance of the system are good.

Bottom line

It is time for us to at least try using these cryptocurrencies. Traditional currencies are not going anywhere in the near future, but some credible cryptos are already proving their purpose by solving the problems that fiat currencies couldn’t solve.  Governments have also recognized the huge benefits that these currencies offer and are making or changing laws to favor cryptocurrencies. Not many governments have regulated these digital tokens yet, but the move has started.

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Forex Course

5. How Large & Liquid Is The Forex Market?

When compared to other markets like the stock and commodity market, the foreign exchange market is the largest in the world in terms of size and liquidity. In this lesson, we shall go over some insights on the size and liquidity of the forex market.

Where is the Forex market headquartered?

The stock markets across the world have different central exchanges where all the transactions are processed. But, in the case of the forex market, there is no central exchange (physical counter) where the transactions can be processed. In fact, this market runs electronically, connected by a network of banks. This, in short, is called an interbank market or an over-the-counter (OTC) market. Hence, this enables traders to trade in the forex market from anywhere in the world. Also, this is one of the reasons for its high volume of trading.

Forex market’s volume

The amount of money traded in the forex market is humongous. Being the most traded market, the value of it reaches up to $3 trillion. The number is made up of all the types of transactions performed in the market. The amount of different transactions is listed as follows:

$1,005 billion comes from spot transactions

$1,714 billion is added from forex swaps

$362 billion accounts for outright forwards

$129 billion for estimated gaps

Currency distribution in the Forex market

There are about seven currencies on which most transactions take place. Out of these currencies, the US Dollar dominates with around 85% of all the operations in the forex market. Next up in the line stands EUR, which is then followed by JPY and GBP. A graphical representation for the same is given below.

Here, the sum of all the variables totals to 200%, as currencies are traded in pairs.

What are the Foreign Exchange Reserves?

They are the assets that comprise banknotes, bonds, deposits, etc. The central bank of a country holds these with two primary purposes. One to maintain the balance payments of a country and the second is to control the confidence in financial markets. These reserves can be held in more than one currency.

According to the International Monetary Fund (IMF), 64% of the world’s forex reserves are made up of the US Dollar. And after USD comes GBP, JPY, and EUR comprising of 4%, 4%, and 2% of the world’s FX reserves, respectively.

Liquidity of the Forex market

Liquidity is simply the possibility to square off a position smooth and quick without causing the market to make a drastic move. In simple terms, liquidity is the level of supply and demand in the market. So, when there are large numbers of buyers and sellers in the market, we can call this market to be highly liquid.

With respect to the Forex market, it is the most liquid market in the world. This implies that the forex market constitutes a large number of participants (buyers and sellers). With high liquidity, one can liquidate their positions much faster and at their quoted price. Moreover, high liquidity causes the prices to move smoothly, gradually, and in small steps. Hence, this even leads to more consistency in the quoting of prices.

Below is the chart of EUR/USD on the 5-minute timeframe. We can see that the prices move smoothly in spite of being in a small timeframe.

Below is the chart of a small-cap stock in the US. Here, we can see that the prices are not moving in a flow, and there are gaps between the prices. And this is solely due to the lack of liquidity in the market.

That’s about the liquidity of the Forex market. We hope you had a good read. Check your learnings by answering the below quiz.

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Categories
Forex Market

An Overview Of The Forex Trading Industry

Introduction

Some of the most relevant markets include the Stock market, Futures market, Options market, and Foreign Exchange market. All these markets provide vast trading opportunities, and out of these, Foreign Exchange AKA FOREX is one of the most popular ones. Forex is nothing but the exchange and trade of different country’s currencies. The first Forex trading market was established in Amsterdam nearly five centuries ago, and this explains the rich history of this market.

The Forex market is the largest yet most accessible market in the world. Largest because the daily trading volume of the Forex market is above $5 trillion. To put that in perspective, the average daily trading volume of the NYSE (largest stock market in the world) is just above $20 billion. By this, we can understand the enormous size of this market. Out of this $5 trillion, retail trader transactions contribute 5% to 6%, i.e., about $400 billion. The rest of the transaction volume is from large institutions and businesses.

We also mentioned accessibility because traders have thousands of retail brokers around the globe to choose from. They can start trading currencies in this market with investments starting from just $100. Forex trading is open 24 hours a day and five days a week. It doesn’t operate on weekends. On weekdays, the market doesn’t get closed at the end of each business day, like how the stock market does. Rather the trading shifts from one financial center to others. Some of the major financial centers include London, Sydney, New York, and Tokyo.

What affects the Forex market?

One of the critical factors that most of the experienced traders pay attention to is the macro-economic trend. The forex market reacts to macroeconomic data more than the stock or commodity market. In a stock market, we have companies that are affected by micro-dynamics, which are specific to that company. But that’s not the case in the Forex market. This market is affected and moderated by GDP, unemployment rates, and inflation. The currency could react positively or negatively depending on the data, but after reacting, the trend will be maintained for a long time. The significant pairs to watch during such news releases are EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The rate hikes from the U.S. Federal Reserve is also closely watched by traders around the world.

The rise of algorithmic trading

Banks and financial institutions are adopting algorithmic trading systems powered by technological advancement. Technology is changing traders’ approach towards the market. There is a boom in engineered computer programs that offer new ways of creating orders with faster trade execution. The automated systems have improved speed and precision. This technology is expected to eliminate trading bias and human errors that increase the risk in a trade. Algorithmic trading improves trend analysis that greatly helps beginners in reducing losses. Due to this, traders are getting more time to analyze markets and trends.

Future of Forex market

The Forex is continuously growing. Trading currencies is still not a mainstream profession in many of the third world countries. There are still many people who aren’t aware of the fantastic opportunities this industry has to offer. One of the important goals of the brokerage firms is to get more and more people involved in pursuing trading as a serious profession.

  • Market volatility will rise as newer strategies are being released and used by traders.
  • Strict regulation in the forex market will also attract conservative traders. However, some traders search for unregulated brokers since they provide inexpensive trading services.
  • Paid systems and strategies will continue to grow among wealthy investors.
  • Trading Forex is getting easier and extremely accessible with the advent of smartphone trading applications.

Bottom line

The Forex industry has changed significantly over the years. Many efforts are being made to create a legitimate trading environment as the industry has become more dynamic and ever-changing. Major European regulators are taking serious steps to tighten control of the Forex market. Besides, they are also introducing new rules to forbid high leverage trading to protect investor’s funds.

A known fact about Forex trading is that most traders fail. It is estimated that 96% of the people end up losing. To be in the succeeding 4%, one should have a disciplined approach to the way they trade. Some of the practices include starting with low capital, managing risk, controlling emotions, and accepting failures. If you follow these rules, you are on track to becoming a successful trader.

Also, education plays an essential role for someone to succeed in their Forex trading journey. We at Forex Academy designed a course just for our readers. By taking up this free course, one can learn everything about Forex trading even if they have zero experience. You can find all of our course articles here.

Got any questions? Let us know in the comments below.

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Forex Course

2 – Preface To The Forex Market

Introduction

Forex AKA Foreign exchange is the largest market in the world where all the global currencies are traded. It can also be considered as a place where individuals, companies, and banks convert one currency into another. The entire Forex market is decentralized and is maintained by the banks across the globe. On average, the daily trading volume of the whole Forex market is more than $5 trillion. This explains the sheer size and liquidity of this market. Forex market is an essential part of the global economy and is active 24/5 (From Monday to Friday)

The Purpose

Typically, the exchange of goods and services happens for money, and this money is nothing but currency. The respective country’s governments determine the value of that currency. Hence the value of one country’s currency is never equal to that of another. This is the reason why we need foreign exchange to exchange one country’s currency to others. Forex market is essential for any of the global imports/exports to happen, for any employer who needs to pay salaries to their overseas employees, for a tourist who is traveling abroad, etc.

Forex trading

It refers to the buying and selling of currencies that belong to different countries. In Forex trading, the buying and selling of currencies happen at the same time. That is, if a trader is trading EURUSD pair, he/she is essentially selling the USD he has in order to buy Euros. Traders make a profit when they sell a currency at a higher price than the cost they paid to buy that particular currency. This entire process was complicated even a decade ago. But now, with the advent of technology, anyone can start trading by using a lot of online trading systems.

Currency Pairs

As discussed above, the buying and selling of currencies happen in pairs. There are three types of Forex currency pairs. They are Majors, Minors, and Exotics.

Major currency pairs are those where the USD is involved. These are the most frequently traded pairs in the market, and they make up to ~85% of the Forex transactions that happen in a day.

Examples: EUR/USD, USD/JPY, GBP/USD etc.

Minor currency pairs are those that don’t contain USD. They are also known as cross pairs. Euro, Pound, and Yen are the most popular currencies that make up the minor currency pairs.

Examples: EUR/CHF, AUD/JPY, GBP/CAD etc.

Exotic pairs are the ones where one is a major currency, and the other is a small or emerging currency.

Examples: USD/PLN, GBP/MXN, EUR/CZK etc.

Types of Forex markets

Spot market – The physical exchange of the currency pair takes place at the point of trade, i.e., as soon as the price is fixed between buyer and seller. The transaction is settled on the spot or at least within a short period of time.

Forward market – Here, a contract is made between the buyer and seller, where they agree upon a price to exchange the currency pair. This contract will be settled at a date in the future or within a range of future dates.

Futures market – Even in this type of market, a contract is fixed between the buyer and seller. A price is set on a future date delivery. The difference between Forward and Futures market is that in the latter, the contract is legally bonded between the parties.

That’s about the introduction to the Forex market. We hope you had a good read. In the next article, we will talk about some important Forex terms and phrases. Now, let’s see if you can get the below questions right.

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