What determines the strength of a currency?

A currency’s strength is determined by the interaction of a variety of local and international factors such as the demand and supply in the foreign exchange markets; the interest rates of the central bank; the inflation and growth in the domestic economy; and the country’s balance of trade. Taking all factors into consideration, the currency strength can be evaluated in three dimensions:

• Value: the relative purchasing power for goods and services in comparison to foreign currencies
• Utility: the relevance as a financial valuation and exchange device in foreign economies
• Reserve: the acceptability in international trade, driving foreign central banks to hold reserves

As the local production activities add further value to the country’s economy, higher purchasing power encourages spending. The surge in the supply and demand stimulates import and export, flourishing the international trade volumes.

The national currency gains utility in the trade-partner countries, which, in turn, drive their central banks to create reserves for it. Such acceptability enables commerce via a direct exchange of currencies without the mediation of a stronger currency like the U.S. Dollar.

It also provides room for manoeuvre in case a trading partner’s currency value fluctuates due to external circumstances. As a result, the national currency strengthens in the money markets and gains value in the Forex pairs.

The U.S. Dollar is currently considered as the strongest currency in the world. The U.S. economy has the largest consumer market, and the USD serves as the primary trade and reserve currency all around the globe.

Around 60% of the world’s central bank reserves, 40% of debt, 90% of forex trades, and 80% of global trade is denominated in dollars. When the world experiences a crisis, everyone looks to the U.S dollar as a shelter from risks. However, many countries and foreign companies borrow in U.S dollars and earn revenue or taxes in their domestic currencies, therefore dollar strength increases default risk.

https://www.avatrade.com/education/trading-for-beginners/currency-strength#:~:text=A%20currency's%20strength%20is%20determined,the%20country's%20balance%20of%20trade

From Fixed--Exchange System to Free Floating Currencies

Bretton Woods Conference (end of World War 2)

One of the major accomplishments of the Bretton Woods Conference was the plan to link virtually all the world's major currencies to the U.S. dollar in a sort of fixed-exchange system, with the dollar serving as an anchor to global economic activity  

The value of the dollar, in turn, would be linked o a fixed amount of gold - one ounce for every thirty five dollars.

The Bretton Woods system allowed countries from Japan to Germany and from France to Brazil to grow and prosper.  But when the U.S. began running huge deficits - printing enormous sums of money to pay for everything from Asian wars to Great Society antipoverty programs - the rest of the world began to lose confidence

Abandoning the Gold Standard

In late 1960s, France began losing confidence in the system and started asking for the actual gold that had been backing up the U.S. dollar, and other nations followed the example.  Soon, more than half of the U.S. gold reserves had been transferred abroad.

The American government decided that the only solution was to abandon the gold standard.  From 1971 onward, the U.S. dollar and virtually all currencies in the world  became fiat currencies, backed by nothing than the faith of the people using them.

From that moment on the Bretton Woods system of fixed exchange rates was transformed into a system of freely floating currencies, with their values determined by the foreign exchange markets.

 

To anticipate a currency crisis or recovery, follow the locals

The feel of the currency is the simplest real-time measure of how effectively a country can compete for international trade and investment.

"The currency feels too expensive"

If a currency feels too expensive, a large and sustained increase in the current account deficit can result, and money will start to flow out of the country.  

The longer and faster a current account deficit expands, the more risk there is of an economic slowdown and a financial crisis.  

Traditionally, that warning light flashed when the current account deficit had been growing at an average rate of 5% of GDP for five years.  

But the recent deglobalization of banking has made it more difficult to finance current account deficits, so the new red line may be around 3%.

Beginning or the end of currency trouble, follow the locals

To spot the beginning or the end of currency trouble, follow the locals.  They are the first to know when a nation is in crisis or recovery, and they will be the first to move.  If the local millionaires are fleeing, so should you.

Once a crisis begins, watch for the current account to bounce back to surplus, which usually means that a cheap currency is drawing money back into the country.  It helps if the financial environment is stable, underpinned by low expectations of inflation, which further encourages investors to return.

Meddling by the government to artificially cheapen the currency

If the government tries to artificially cheapen the currency, markets are likely to punish this meddling, particularly if the country has substantial foreign debt or does not manufacture exports that can benefit from a devaluation.  

Cheap is good only if the market, not the government, determines the feel of a currency.

You Can't Devalue Your Way to Prosperity

A cheap currency is an advantage in global competition.  It might seem smart for national leaders just to devalue the currency.  But this is a form of state meddling that has proved increasingly ineffective.

Since the crisis of 2008, many nations have tried to improve their competitive position by devaluing currencies, but none have managed to gain an advantage.

The central banks of the United States, Japan, Britain and the Eurozone have pursued policies that effectively amount to printing money, in part as a way to devalue their currencies.  But each has achieved at best a brief gain in export share, because rivals quickly match each other's policies.

The rise in 2016 of Donald Trump, who keeps a hawkish watch on the moves of foreign central banks, made it increasingly difficult for any nation to devalue its currency without being called to account for it.

By 2019, many emerging countries had seen sharp currency depreciation, but with little boost to growth.  

• One reason was foreign debt; since 1996, in the emerging world, the debt owed by private companies to foreign lenders had more than doubled as a share of GDP, reaching 20% or more in Taiwan, Peru, South Africa, Russia, Brazil and Turkey.   For these countries, devaluation made it more expensive for private companies to service foreign debt, and forced them to spend less on hiring workers or investing in new equipment.

• Another factor that can derail devaluations is heavy dependence on imported food and energy.  In this case, a cheaper currency will make it more expensive to import these staples, driving up inflation, further undermining the currency and encouraging capital flight.  This is a recurring syndrome in nations like Turkey, which imports all its oil, but the problem is spreading.

• These days, even manufacturing powers are mere cogs in a global supply chain, relying heavily on imported parts and materials.  They thus find it harder to capitalize on a cheap currency because devaluation raises the prices they pay for those parts and materials.

A rare occasion when devaluation worked

China, in 1993, was one of the rare devaluations that worked.  

China had little foreign debt, it did not rely too heavily on imported goods, and its already strong manufacturing sector grew faster after Beijing devalued the renminbi.  

But this was an exception that proves the rule in general you cannot devalue your way to prosperity.

Devaluation is increasingly less likely to work

Moreover, devaluation is increasingly less likely to work, even in China, which has grown to command 13% of global exports, the largest share any economy has reached in recent decades.  It is just simply too big to expand much further and if it does devalue, others retaliate.  

In late 2015, China devalued the renminbi by 3%, and many emerging nations responded immediately, erasing any competitive gain that Beijing hoped to achieve.

China is also making increasingly advanced exports, which are less price sensitive and gain less from a cheap currency.  

In Korea, Taiwan, and China, technology and capital goods make up a rising share of exports.  

The more advanced the economy, the less of a boost it gets from devaluations.

Weak ringgit to impact 5 sectors

Weak ringgit to impact 5 sectors

BY INTAN FARHANA ZAINUL

Clearer picture: A money changer worker counts US dollar notes for a customer in Kuala Lumpur. CIMB Research expects the ringgit’s volatility to contrinue until there is greater clarity on the new US administration’s economic and trade policies

PETALING JAYA: Exporters are back on investors’ radars, following the recent steep decline in the value of the ringgit against the greenback after the United States presidential election last week.

However, there is no rush yet to pick up bargain stocks on Bursa Malaysia.

The FBM KLCI took another big hit yesterday after falling by more than 1% for the second consecutive day amid heavy foreign sell-off.

“Fundamentally, we think markets may be overreacting to the ‘Trump risk’ in the near term, as speculative positioning takes hold,” said CIMB Research in a note to clients

On the volatility of the ringgit, it expects the trend to remain until there is greater clarity on the new US administration’s economic and trade policies.

The ringgit strengthened marginally yesterday to 4.33 against the US dollar.

CIMB Research said HeveaBoard Bhd, Top Glove Corp Bhd and Evergreen Fibreboard Bhd are among the companies that would gain the most from the weak ringgit in terms of earnings.

“Share prices of YTL Power International Bhd, Genting Plantations Bhd and Inari Amertron Bhd fell 1%-3% last Friday despite being beneficiaries of a weak ringgit. We have ‘add’ calls on these stocks and the selldown could present buying opportunities for investors,” it added.

The banking sector was also among the beneficiaries of the weaker ringgit on the back of overseas operations, CIMB Research said.

Among the banks that are set to benefit are Malayan Banking Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and Public Bank Bhd.

On the other hand, CIMB Research reckoned that companies that have exposure to the automotive and airline industries, namely, Tan Chong Motor Holdings Bhd, Bermaz Auto Bhd, UMW Holdings Bhd, AirAsia Bhd and AirAsia X Bhd, would be negatively impacted from the stronger US dollar and yen.

“AirAsia will be impacted by the weaker ringgit, although this is buffered to some extent by the low oil prices. About 60%-70% of AirAsia’s costs are US dollar-denominated,” it added.

On the contrary, although many research houses are bullish on the export counters to benefit from the weak ringgit, Hong Leong Investment Bank (HLIB) Research said that the sector is vulnerable from president-elect Trump’s anti-trade views.

“While the market may continue to react to the strong US dollar, we caution that export stocks may still be affected by Trump’s anti-trade sentiment.

“The technology sector is more vulnerable to any trade policy change compared to resource-based sectors,” it said.

HLIB Research said the strong US dollar would be positive for sectors such as rubber product manufacturers, the gaming industry as well as technology companies.

It is negative for sectors such as automotive, aviation, telecommunications, consumer and power.

While the cheaper ringgit does not necessarily translate to higher exports for Malaysian products, companies such as rubber glove makers, semiconductors and furniture-related companies are expected to benefit from the weaker ringgit, according to analysts.

“Naturally, beneficiaries of the strong US dollar are exporters and companies with significant US-dollar assets,” said UOB KayHian in a report yesterday.

The research house prefers the electric and electronic manufacturers such as Inari, VS Industry Bhd and EG Industries Bhd on the back of revenue growth and margin improvement as compared to exporters.

“We are less enthusiastic on the loftily-valued rubber glove manufacturers, as the supply-demand dynamics for nitrile glove remain unfavourable.

“Hence, continuing downward pressure on the US dollar pricing of nitrile gloves could mostly offset the positive US dollar effect,” it said.

UOB KayHian reckoned that the stronger ringgit would not have a huge impact on exporters compared to in 2015.

“Since a strong US dollar is now a consensus view (unlike in 2015), buyers have actively squeezed down the US dollar pricing on Malaysian exporters, which reduces the quantum of the exporters’ windfall margins and hence the exporters’ ability to positively surprise on earnings,” it said.

http://www.thestar.com.my/business/business-news/2016/11/15/weak-ringgit-to-impact-5-sectors/

Ringgit more steady, but volatility to persist

Tuesday, 15 November 2016

Ringgit more steady, but volatility to persist

Sunway University business school professor of economics Yeah Kim Leng(pic) said the spike showed that there was strong demand for hedging against expectations of a continued weakness in the ringgit, ahead of expectations of an increase in the US interest rate.

PETALING JAYA: The ringgit traded in calmer waters against the US dollar, with the difference in the price of the currency in the official and speculative markets narrowing.

But indications are that the volatility of the local unit will persist in the next few weeks, analysts said.

The ringgit appreciated by 0.26% to RM4.33 against the US dollar yesterday in the spot market.

The spread between the onshore US dollar-ringgit exchange rate and the rate offer in the offshore market, also known as the ringgit non-deliverable forward (NDF) market, also narrowed.

At the time of writing, the one-month US dollar-ringgit exchange rate in the NDF market, which is not recognised by Bank Negara and deemed as speculative, was trading at RM4.38, which is not far off the onshore rate of RM4.33.

“The ringgit appreciated against the US dollar as there was enough supply of the greenback in the system, unlike last Friday,” said a trader.

Last Friday, banks did not go into any US dollar-ringgit transactions upon the behest of Bank Negara, as the rates were too volatile for the local banking system to price the US dollar appropriately. On Sunday, Bank Negara assured that there would be adequate supply of the US dollar, which contributed largely to the calm trading environment yesterday.

However, the one-month forward yield of the US dollar-ringgit trade in the NDF market spiked up to 17% in early trade. The forward yield was closer to 10% after 5pm.

The forward yield indicates the level of interest by speculators taking an arbitrage position between the onshore and offshore US dollar-ringgit exchange rate. The yields are normally at about 3%.

Yesterday saw an abnormal spike in the one-month forward yield of the US dollar-ringgt trade in the NDF market.

Sunway University business school professor of economics Yeah Kim Leng said the spike showed that there was strong demand for hedging against expectations of a continued weakness in the ringgit, ahead of expectations of an increase in the US interest rate.

“There is a lot of speculation that the interest rate hike will come steeper and faster, given the new US president’s inclination towards greater fiscal spending to boost the economy and the corporate sector.

“Hence, what’s happening is an outflow of foreign funds from emerging markets back to the US by investors seeking higher returns there.”

Yeah said that until there is more clarity on what the new president’s exact policies are, there would be continued volatility across the markets.

Meanwhile, a senior technical analyst who tracks both the stock and currency markets told StarBiz that although the ringgit strengthened against the dollar, the charts indicate weakness of the local currency in the next few weeks.

According to the technicals, the US dollar/ringgit daily chart showed that the greenback had reached the overbought levels, suggesting that the ringgit may appreciate over the next few days.

On the stock market, he said the 14-day relative strength index was oversold, indicating that there could be a technical recovery in the short term.

“However, the upside potential is likely to be capped,” he said.

He added that important support was pegged at the 1,600-point psychological level, while the immediate resistance is expected at the 1,640-point barrier.

Another economist when contacted said that “what seems to be happening is that there is selling pressure on the FBM KLCI and bonds in the onshore market, as the prospect of higher US bond yields are weighing negatively on the emerging-market space such as Malaysia. That has added pressure on the ringgit.”

Traders have also taken cognisance of Bank Negara’s warning on Sunday that it would not tolerate any transactions that facilitated trade on the NDF market. The NDF, which is an instrument for investors to trade forward rates for the ringgit, is settled in US dollars and is not recognised by Bank Negara.

Meanwhile, CIMB Investment Bank Bhd said the ringgit could touch between RM4.50 and RM4.80 against the US dollar within the next three to six months premised on the lack of clarity of the new US administration’s policies.

“Since the election, the US yield curve has steepened to reflect the market’s expectation of an inflationary impact of (president-elect Donald) Trump’s campaign promises.

“This narrowed the premium of emerging-market yields over the US and resulted in the unwinding of carry trades funded in US dollar.

“The ringgit has fallen in line with this trend and the weakness was further compounded by the relatively high foreign holdings of Malaysian government bonds,” it said in a report yesterday.

According to MIDF Equities Research, foreign funds were net sellers on Bursa Malaysia in the week ended last Friday at RM800.4mil, although the amount was lower than the RM948.1mil offloaded in the previous week.

“Still, it was the seventh-highest weekly outflow this year, estimated based on transactions in the open market which excluded off-market deals,” it said in its report.

The benchmark FBM KLCI ended at 1,616.64 points, 17.55 points lower than Friday’s closing.

http://www.thestar.com.my/business/business-news/2016/11/15/ringgit-more-steady/

Currency speculation takes on a life of its own in a floating exchange system.

A floating exchange rate system is based on the notion that market forces, as opposed to government policy, determine currency exchange.

Buyers and sellers of a currency determine the price.

Buyers and sellers can include

• traders, 
• fund managers, 
• banks, 
• multinational corporations and 
• governments.

Although a floating system leaves the process of determining exchange rates to market forces, those forces can force a currency to collapse.

If a major fund assumes a short position in a particular currency, it can push that currency, and in turn the underlying economy, to the verge of collapse.

It does this through a series of large trades distributed over several days.

Other traders sense economic doom on the horizon as they witness these trades and decide that they too must unload positions in that currency.

The currency drops 1%, 3%, 5%, ...

The businesses in this country are forced to contend with decreased buying power as a result of the declining currency.  

The goods and services, they are buying from their trading counterparts overseas (e.g. U.S.) became a lot more expensive thanks to the currency speculators.

The currency drop continues and soon everyone is panicking.

Before long, major corporations and individuals must cut spending as foreign-produced items are more expensive than before.

This can prove disruptive and in extreme cases disastrous.

Such examples are far from regular occurrences.

Government imposed exchange limits will prevent complete currency collapse caused by speculation.

The above illustrates what could happen when currency speculation takes on a life of its own in a floating system.

Currency Trading

Currency can be traded much like securities or as derivatives.

The purposes for trading vary but generally can be distilled down to either:

• speculation or 
• hedging.

Currency Speculation

Currency speculation can be a lucrative pursuit for skilled traders.

By analyzing macroeconomic variables such as inflation, interest rates, income levels, and governmental policies, currency traders can place bets on a currency with the hope of profiting from them.

Currency speculation can be complicated by the combination of market forces, the outcome of which can be difficult to predict.

Currency trading is complicated.   

[For example:

• A trader decides he wants to bet on the euro because he believes the European Central Bank will raise interest rates.
• At the same time, countries across the European Union are reporting substantial increases in inflation.
• This trader learns that one of the largest currency hedge funds is selling its position in the euro.]

There is no foolproof algorithm for predicting what will happen to a particular currency as a result of movements in influential variables.

No one can predict the direction currency will take 100 percent of the time.

Currency Hedging

Currency hedging is a practice that can be employed 

• by anyone taking a relatively large speculative position in a currency or 
• by a business seeking to manage risk.

Here are several protective hedging strategies:

• Options
• Forwards
• Futures

[Suppose Company X starts buying parts from a supplier in Europe.

Part payments are made in euros and are due 30 days after receipt of the parts

The euro seems to be rising against the dollar, which leaves Company X rather vulnerable.

In fact, if the euro rises significantly by the time payment is due, it could wipe out a good portion of Company X's expected profits.

What can the company do?

Here are several protective hedging strategies:

1.  Options.  

Buy calls on euros.

If the euro rises, the call becomes worth more, offsetting the increased payment amount owed to the supplier.

The downside of this strategy is that calls come at a price.

2.  Forwards

Company X can structure a forward contract to lock in a specific exchange rte, thus hedging from any exchange rate fluctuations.

The forward rate would be the specified exchange rate at which the currency will be exchanged.

3.  Futures

Company X can purchase a currency future requiring a standard amount of currency to be exchanged at a specific exchange rate on a specific settlement date.

Company X could purchase the future on an exchange, enabling the company to sell the future if rates hold or reverse. ]

[Now, suppose Company X sells its products in Europe and payments are made in euros.

The company stopped buying parts from Europe and now merely exports its products to Europe.

Sales are often credit-based, leaving the company with hefty accounts receivable.

What happens if these credit payments are owed 30 days after the customer takes possession?

If the euro fell against the dollar, the company would see its profits erode.

Hedging strategies can be employed by using the tools mentioned previously:

1.   Options

Buy puts on euros.

If the euro falls, the puts become worth more, offsetting the decreased payment amount owed to the company by its customers.

2.  Forwards

Just as before, Company x could create a forward contract to lock in the rate received from its customers.

3.  Futures

Company X could purchase dollar futures.  

If the euro declines against the dollar, the dollar future will increase, off-setting any loss of value on the receivable.]

Currency Arbitrage

Arbitrage allows an investor or trader to capitalize on pricing discrepancies.  

Arbitrage is used widely in the currency markets and usually takes on the following forms.

Locational Arbitrage

Locational arbitrage is based on the idea that one can buy currency at one location and sell it immediately at another location, instantaneously locking in a profit.  

A pricing discrepancy in the market allows for this.  

Arbitrage opportunities are generally short-lived, so you have to act fast, and usually the market corrects itself quickly.

Triangular Arbitrage

What if you could buy dollars with pounds, exchange the dollars for euros, and then exchange the euros back to dollars, earning a tidy profit during this round trip?

To determine whether a triangular arbitrage opportunity exists, you first would determine the cross exchange rate for dividing the USD to euro rate by the USE to GBP rate.

This would give you a cross exchange rate, GBP to euro.

This tells you that the bank is offering too many euros for pounds, which means the arbitrage opportunity does indeed exist.

You earned a profit because the bank overstated the cross exchange rate.

You were able to capitalize on this and earned a profit in the process.

The Biggest Problem in Currency Trading

The BIGGEST PROBLEM currency market players face is not understanding why currency exchange rates move in a particular direction when the factors affecting currency indicate something else

Unfortunately, the driving forces behind currency do not always indicate a definitive outcome; that is why currency trading is not for the faint of heart.

How to manage currency fluctuations and how to profit from them?

Nearly identical products sold in different countries can have major price differences when currency exchange is factored into the equation.

Directional shifts in currency exchange rates could allow one to hedge against or even profit from those shifts.

In a global economy, currency plays a pivotal role in the way transactions are structured.

From investment banking to corporate management, currency is involved in nearly all international financial decisions.

As the global economy becomes more complex, currency issues will continue to evolve.



Currency Exchange Rates

With the advantages of selling to the world come the challenges of managing global finance.

Currency plays a prominent role in the way businesses conduct their business and to whom they sell.

Financial managers must develop currency strategies to manage their receivables and payables.


For example, if the US dollar drops against the Malaysian Ringgit, it could hurt a Malaysian exporting company whose receivables are denominated in US dollar.

If the Malaysian Ringgit increases in value against the US dollar, it could raise the Malaysian foreign  owned company's manufacturing costs and perhaps cause management to consider moving its manufacturing facilities abroad.

Shifts in currency exchange rates can affect how much a company ultimately earns; therefore, a solid understanding of currency will allow management to craft an effective strategy to address unexpected shifts.



Determining the Exchange Rate

The exchange rate of any currency is its price.

It indicates how much of one currency is needed to buy one unit of another currency.

Suppose it takes 1 US dollar to purchase MR 3.50.  The value of 1 US dollar would be MR 3.50.

The value of 1 MR in US dollars therefore would be 0.2857 US dollar (1 US dollar/ MR 3.50).



How is this value determined?

What causes that 1 US dollar to equal MR 3.50 and 1 MR to equal 0.2857 US dollar?

Currency is no different from anything that is bought or sold, and therefore, economic principles determine its price.

A currency price is based on the price at which demand for that currency equals supply of that currency.  This is known as the equilibrium exchange rate.

Changes in supply and demand affect the exchange rate.



Currency Supply and Demand Curve:  

The supply curve for the currency is upward-sloping.  The supply of the currency increases when the value of the currency is strong.

The demand curve for the currency is downward-sloping.  The buyers tend to demand more of something when its price is lower.

For example, Americans would be more likely to exchange their dollars for yen when the value of the yen is lower.  This enables American consumers and corporations to buy more Japanese products at lower price.

When the value of yen is higher, demand for yen will be lower as Americans are less likely to exchange their dollars for yen as Japanese products are now more expensive.


Factors That Affect Currency Exchange Rates

The following factors have a direct impact on exchange rates.

Relative Inflation

If the US experiences higher inflation relative to Japan, U.S. goods become more costly than Japanese goods.

As a result, American consumers will demand Japanese substitutes.

This will increase the demand for Japanese yen needed to purchase Japanese products.

At the same time, the supply of yen for sale probably will decrease as Japanese holders of yen are less likely to buy American products, which are now more expensive.

The increased demand for yen and the decreased supply of yen will push the price of yen higher.


Interest Rates

If U.S. interest rates rise relative to Japanese interest rates, the supply of yen for sale will increase as more holders of yen will want to purchase dollars to earn more interest in dollars.

As a result, the value of yen will decrease.

Furthermore, the demand for yen should decrease because investors would rather deposit their money in American banks and therefore will demand dollars more than yen.

The decrease in demand combined with the increase in supply will cause a drop in the value of yen as a result of rising interest rates in the United States.


Income

If income levels in the United States increase while income levels in Japan remain unchanged, demand for Japanese goods should increase along with yen.

The shift in relative income is not likely to affect the supply of yen as a change in U.S. income levels will do little to incentivize Japanese yen holders to exchange more yen for dollars.

The increase in demand therefore should raise the exchange rate as American consumers probably will buy more Japanese products overall.

Speculation

Speculators can cause dramatic movements in currency prices.

They may base their trades on economic predictions or in some cases on expectations of what other high-volume traders will do next.

As more market participants move in tandem, currency values are often driven less by economic fundamentals and more by momentum traders.


Government

By imposing trade barriers and foreign exchange barriers, governments can affect currency values indirectly.

They do this by making it more difficult for foreign businesses to engage in import and export activity, which in turn will affect supply and demand for currency.

At the same time, a government can buy or sell its country's currency, which will affect its supply and ultimately its value.

Government policy changes, however, may not achieve the desired outcome when it pertains to currency .... or anything else for that matter.


Interaction of Factors

Any combination of these factors can affect currency in unpredictable ways.

If you could predict precisely how a combination of factors will affect currency values, you would be busy trading currency from your private island!

Currency plays - Foreign Currency Deposit, Foreign Exchange Futures and Currency Warrants.

Foreign Currency Deposit

The easiest way to invest in foreign exchange (FX) is to switch your Ringgit dollar deposit for a foreign currency deposit.


FX futures or leveraged FX

To capture short term movements, some investors may choose to invest in FX futures or leveraged FX products.  (However, foreign exchange spreads charged by banks vary from one to another.  Besides, for futures trading, investors are required to open a futures account.  There is also the risk of margin calls.  This is obviously not every investor's cup of tea.)


Currency Warrants

The trading mechanism of Currency Warrants is much the same as other warrants.  Investors only have to pick a suitable warrant in terms of price and maturity, as well as implied volatility, which should be relatively low as compared with others with similar terms.

Foreign exchange is a relative game.  For a Currency Warrant, investors must always make sure which one in the currency pair is the positive play and which on the negative play.



Additional notes:

Compared with other investment instruments, Currency Warrants are more flexible.  They can give a higher potential return without the risk of margin calls in futures trading.  So, they are suitable for investors who want to profit from foreign exchange, but have relatively low tolerance for high risks.

Currency Warrants have limited downside, but unlimited upside.  So, if one gets the market wrong and is wise enough to stop loss, the loss will be just a portion of the capital  Yet, no matter how small the investment amount is, one should always stop loss if one gets the market wrong.

A look at a currency table

Now, let's take a look at a currency table:

Row 1 & Column 1: Currency Name (or symbol) The currencies are exactly the same in both the column and the row. This table allows you to compare the value of a currency in relation to another. The only exception on this table is gold, which is commonly quoted in currency tables because it is considered to be an alternative currency that anyone can purchase.

If you are reading this table the values are in the following context:

$1 in currency of row #1, is worth $___ in column #1 dollars.

For example, 1 euro is worth $1.3926 in Canadian dollars. If you were in Canada and you wanted to exchange your 1 euro for Canadian dollars, you would get $1.3926 in return. On the other side of the equation, if you had $1 Canadian and you wanted to convert it to euros, you would get 0.7181 in return. Both of these numbers are circled in red on the table.

It is also important to note that 1/1.3926 = 0.7181. If you only have the currency rate for one direction, then all you need to do is divide one by that number to find the value in the other country's currency.

Read more: http://www.investopedia.com/university/tables/tables5.asp#ixzz28JIVJCza

Economic Factors - International Economic Factors

A significant issue when dealing with international companies is that transactions occur in more than one currency. A company that collects revenues in a foreign currency will be either long or short in that currency, depending on whether they receive more revenue than they pay out in expenses (long) or less revenue than they pay out (short). 

Currency Exchange RatesChanges in currency exchange rates can have a huge impact on both business profits and on securities prices. These rates are expressed as the ratio of the price of one currency against the price of the other.

When the U.S. dollar weakens against another currency, that currency is worth more dollars. In this case, foreign investment in the U.S. dollar will decline. Imports will also decline as they will be more expensive to U.S. businesses and consumers. On the other hand, a weaker dollar makes importing U.S. goods more attractive to foreign countries. Therefore, exports will increase. 

When the U.S. dollar strengthens against another currency, the dollar will buy more of that currency. Foreign investment will increase as foreign investors will be attracted to a strong U.S. dollar. U.S. imports will increase as it is cheaper for U.S. businesses and consumers to purchase foreign goods. Finally, U.S. exports will decrease as U.S. goods will be expensive for consumers in many foreign countries.

Balance of TradeThis is the largest component of a country's balance of payments. (The balance of payments is a record of all transactions made by one particular country during a certain period of time. It compares the amount of economic activity between a country and all other countries.)

Balance of trade is the difference between exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

A country has a trade deficit if it imports more than it exports, and a trade surplus if it exports more than it imports.

The balance of trade is one of the most misunderstood indicators of the U.S. economy. For example, many people believe that a trade deficit is a bad thing. However, whether a trade deficit is bad thing or not is relative to the business cycle and economy. In a recession, countries like to export more, creating jobs and demand. In a strong expansion, countries like to import more, providing price competition, which limits inflation and, without increasing prices, provides goods beyond the economy's ability to meet supply. Thus, a trade deficit is not a good thing during a recession but may help during an expansion.

Find out what it means when more funds are exiting than entering a nation in the article Current Account Deficits.

Read more: http://www.investopedia.com/exam-guide/finra-series-6/economic-factors/international-economic-indicators.asp#ixzz1yhSg2SwE

Currency Trading for DUMMIES (Getting Started Edition)

Currency Trading for DUMMIES


GETTING STARTED EDITION


by Mark Galant and Brian Dolan




https://secure.efxnow.com/forex2/eng/ct-dummies.pdf

What Is the Proper Risk and Reward Ratio in Forex Trading?

Risk/Reward Ratio in Forex - What Is the Proper Risk and Reward Ratio in Forex Trading?

The solution is in moving the stop loss. You should not let your stop loss remain at its initial position. To have a 1:3 trade, the distance of your entry and your final target should be splitted into 3 parts (at least), while each part is equal to your original stop lossvalue. For example if you have a 50 pips stop loss, you should have a final target for 150 pips which should be splitted into three 50 pips levels. Then you should move your stop loss in three stages (in this example I assume that you take a 3% risk in each trade):

1. If the price reaches to the first 1/3 level, you should move the stop loss to breakeven. At this stage, if the price goes against you and hits the stop loss, you will get out without any profit/loss, BUT you should consider that you had an initial risk of 3%.

2. If it reaches the 2/3 level, you should move the stop loss to 1/3 level. At this stage, if the price goes against you and hits the stop loss, you will get out with a profit which equals your initial risk. For example if your stop loss has been 3% of your account, you will get out with a 3% profit. Therefore, such a trade will be ended as a 1:1 risk/reward trade.

3. If it becomes so close to the final target, you should move the stop loss to 2/3 level. Then you have to wait until it hits the finaltarget or returns and hits the stop loss. At this stage, if it goes against you and hits the stop loss, you will get out with a profit which is twice of your initial risk. For example if your stop loss is 3% of your account, you will get out with a 6% profit. Therefore, such a trade will be ended as a 1:2 risk/reward trade. If the price hits the final target, your trade will be closed with a 9% profit and so you will have a 1:3 risk/reward trade.

So, to have a 1:3 trade, you will have some -3% trades which are those trades that hit the stop loss at its initial position. You will also have some 0% trades that are those trades that hit the stop loss at breakeven. Some of your trades will be +3% trades which are those that hit the stop loss at 1/3 level. Some will be +6% trades which are those that hit the stop loss at 2/3 level. And finally, some trades will be +9% trades which are those that trigger the final target.

Now the question is what percent of your trades will be -3%, 0%, +3%, +6% and 9% trades?

It is impossible to answer the above question, because it depends on many things including the trading strategy and market condition. 

Read more here:

http://www.forexoma.com/what-is-the-proper-risk-and-reward-ratio-in-forex-trading/

Please note that forex and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved.

Popular With Investors, Emerging Markets Dread Flow of Cash

By BETTINA WASSENER
Published: October 18, 2010

HONG KONG — The World Bank flagged the potential risks on Tuesday of the flood of cash heading into emerging markets, while South Korea and Brazil signaled additional measures aimed at stemming the tide, highlighting how worried many emerging nations have become about the extent to which inflows have pushed up their currencies.

Yoshihiko Noda, the Japanese finance minister, added his voice to the chorus of concern about the flow of capital to emerging economies and called on finance ministers of the Group of 20 major economies to seek ways to stabilize currencies when they meet in South Korea this week, Reuters reported.

“Currencies will be the topic that many people will be talking about” at the meeting, Reuters quoted Mr. Noda as saying. “I hope that good ideas will be put forward there.”

A sharp rise in investments flowing into developing nations has caused many emerging-nation currencies to strengthen sharply in recent weeks, to the dismay of local policy makers and businesses, which fear a loss of competitiveness as their goods become more expensive in dollar terms.

Investors seeking to tap the positive growth environment, and the higher interest rates that are in force in many emerging-market economies, have flocked into bonds, equities and property, generating rising concern about asset bubbles.

The trend has added complexity to what was, until recently, a currency debate focused largely on the United States and China, with Washington asking Beijing to allow the renminbi to fluctuate more freely against the U.S. dollar and China resisting a rapid appreciation, fearing a potentially devastating effect on its export sector.

“This is no longer just a bilateral debate between the U.S. and China,” Frederic Neumann, a senior Asia economist at HSBC, said in Hong Kong on Tuesday.

Moreover, analysts say that the influx into emerging markets — and the upward pressure it puts on their currencies — is likely to receive added impetus if, as is widely expected, the U.S. Federal Reserve resumes buying vast amounts of U.S. government debt to aid recovery.

“Should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for large capital inflows — especially foreign direct investment — with ensuring competitiveness, financial sector stability and low inflation,” Vikram Nehru, chief economist at the World Bank for the East Asia and Pacific region, said in a statement accompanying an update Tuesday on the region’s economy.

The bank nudged up its 2010 growth forecast for the region — which includes China, Indonesia and Southeast Asia, but not India and Japan — to 8.9 percent, from its previous projection of 8.7 percent.

Growth is expected to slow next year as spare production capacity becomes scarce, economic stimulus measures are unwound and economic growth in the advanced economies remains relatively flat, the World Bank said, lowering its 2011 forecast to 7.8 percent from the 8 percent it had projected in April.

The bank also stressed that renewed flow of capital into the region, and the rise in asset prices that this has fueled, now presented a “growing risk to macroeconomic stability.”

Some emerging nations have started to take steps to slow these inflows, for example by raising taxes on foreign purchases of local bonds. Many have also intervened in the currency markets to slow the ascent of their currencies.

Brazil, where interest rates are particularly high and act as a magnet for foreign cash, raised taxes on Monday for foreigners buying local bonds, its second such move this month. Announcing the new measures, the Brazilian finance minister, Guido Mantega, called for a coordinated approach to the increasingly acrimonious topic of relative currency valuations. South Korea, meanwhile, said Tuesday it would consider lifting tax exemptions on government bonds owned by foreign investors. Such a step would make it less attractive for foreign investors to put their money in such instruments.

Ideally, the meeting of G-20 finance ministers, and a summit meeting next month of G-20 leaders, would bring about “a coordinated appreciation of emerging markets currencies, gradually, over time, to help rebalance the global economy,” Mr. Neumann of HSBC said. If not, he added, “we might see further unilateral actions aimed at protecting currencies.”

http://www.nytimes.com/2010/10/20/business/global/20asiaecon.html?_r=1&ref=business

US is currency war's 'tomb maker': economist

October 14, 2010 - 1:27PM

 

The United States fired the first shot in the currency war and the rest of the world must be on guard for its deliberate strategy to devalue the US dollar, a Chinese economist says.

In a front-page commentary in the overseas edition of the People's Daily, Li Xiangyang today described the United States as the conflict's "first maker of tomb figures", a Chinese idiom that means someone who creates a bad precedent.

Li, head of the Asia department at the Chinese Academy of Social Sciences, a top government think tank, said continued intervention in currency markets by developed economies would deal a blow to global economic recovery.

Chinese leaders have warned before that loose monetary policies in the United States pose a serious challenge for emerging markets, but rarely in such strident language, a window onto the rising anger in Beijing.

"The dollar's depreciation may appear to be market-driven. In reality, it is a depreciation coloured by very strong, deliberate actions," Li said in the paper, which serves as the chief mouthpiece of China's ruling Communist Party.

The overseas edition of the People's Daily is a smaller offshoot of the domestic edition.

Li said the Federal Reserve's announcement that it might soon launch another round of quantitative easing by buying bonds and other financial assets had been the key factor pulling down the dollar.

The motives were plain enough, he said.

Without a weaker dollar, the United States would have no hope of meeting President Barack Obama's goal to double exports in five years, Li said.

Dollar depreciation will also serve longer-term interests by generating inflation and easing the debt burden that the financial crisis dumped on the US government.

"If the global financial crisis was about nationalising private debt, then in the post-crisis period the urgent need of the United States is to internationalise its national debt," he said.

Reuters

China calls for more Asian clout in global economy

October 5, 2010 - 7:03AM

The surging economies of Asia should be granted more power in the traditionally Western-dominated global financial institutions, Chinese Premier Wen Jiabao said on Monday at the opening of the Euro-Asian summit.

The start of the two-day 48-nation meeting, set amid the high security and gilded opulence at the Belgian royal palace, underscored the Asian nations’ demands for a rebalancing of international financial structures as they lead the world out of recession.

Premier Wen stressed that Asian leaders expect Europe to relinquish some seats at the International Monetary Fund (IMF), the international lender charged with helping nations that get into currency and financial crises.

‘‘We need to improve the decision-making process and mechanisms of the international financial institutions, increase the representation and voice of developing countries, encourage wider participation,’’ Wen told the other leaders.

‘‘We must explore ways to establish a more effective global economic governance system.’’

The Chinese premier and some other Asian leaders made it clear that Asia would start making its robust economic growth count on the global stage.

Cambodian President Hun Sen stressed the Asian economies should be recognised for leading the global economic recovery.

While demand in the EU (European Union) and US economies was once the driver of growth, it is in decline compared to demand growth in Asia.Even Germany, the economic giant of the European Union, paid tribute.

‘‘We have to thank the Asian upswing for the positive economic development,’’ German Chancellor Angela Merkel said.

Because of the swing in economic momentum, the battle for seats at the IMF has become a symbolic battle ground.

Last week, the 27-nation EU said it could give up some of its power base at the IMF to emerging countries, a concession that could cost it two seats on the governing board and the right to have a European heading the Washington DC organisation, which hands out billions of US dollars around the world.

At the moment, EU countries occupy nine of the 24 seats.

‘‘The fact that Europeans show us the flexibility and willingness to negotiate is important,’’ said Rhee Chang-yong, a South Korean delegate.

‘‘For us, the IMF quota reform is very symbolic and very important,’’ he said.

South Korea will organise the Group of 20 (G20) meeting of the world’s major economies next month and expects to have an agreement then.

The leaders of 48 nations face potential clashes on market restrictions and trade surpluses.

On Wednesday, there will also be bilateral EU summits with China and South Korea.

Overall, the nations from the two continents represent about half the world’s economic output and 60 per cent of global trade.

But, instead of Europe driving the summits, the emergence of China as a new trading juggernaut has somewhat turned the tables at the biennial meetings.

Last week, the IMF said that Asian and Latin American economies were doing well but prospects for some European countries, including Greece, remain uncertain.

On Wednesday, the EU leaders and South Korean President Lee Myung-bak will sign a free trade pact that will slash billions of dollars in industrial and agricultural duties, despite some nations’ worries that Europe’s auto industry could be hurt by a flood of cheaper cars.

The deal - the first such pact between the EU and an Asian trading partner - will begin on July 1, 2011.

Japan’s Prime Minister Naoto Kan will pursue a free trade agreement in his bilateral meetings with European leaders, said Foreign Ministry spokesman Satoru Satoh.He said Japanese business was ‘‘alarmed’’ by the EU’s deal with Seoul.

Japan feels it will be at a competitive disadvantage with South Korea, which has an agreement with the EU that threatens to take a bite out of Japanese exports, particularly of cars and televisions, he said.

While Japan is anxious for an agreement as soon as possible, he said the Europeans still lack consensus among its 27 members.

Besides the economy, Japan also has an issue with China, as both continue a diplomatic row following the arrest of a Chinese fishing boat captain whose trawler collided with Japanese patrol vessels near disputed islands.

Despite the formal opening, economic discord might also surface at the summit.

Many Western nations have complained that China keeps its currency undervalued to give its exporters an unfair price advantage on international markets while at the same time China closes off its markets, keeping European businesses out.

AP


http://www.smh.com.au/business/world-business/china-calls-for-more-asian-clout-in-global-economy-20101005-164p5.html