Top 5 Forex Questions Answered

1, What’s different about the forex market?

Currency trading does not take place on a regulated exchange, nor does a governing body control it. Instead, members trade based on credit agreements, essentially relying on nothing more than a metaphorical handshake. And because FX participants must compete and cooperate with each other, self-regulation provides effective control.

2, What is a pip?

Pip stands for Percentage In Point. FX prices are quoted to the fourth decimal point. For example, if a bar of soap cost $1.20, it would be quoted in the FX market at 1.2000. One pip change would be 1.2001. A pip is the smallest increment in FX trading.

3, What are you really selling or buying in the currency market?

Nothing. The FX market is purely speculative, meaning all trades exist as computer entries. Profits and losses are calculated in dollars and recorded on the trader’s account.

4, Which currencies are traded in the forex markets?

The four major currency pairs are the euro/U.S dollar, the dollar/Japanese yen, the British pound/dollar, and the dollar/Swiss franc. The three major commodity pairs are the Australian dollar/U.S. dollar, the U.S. dollar/Canadian dollar, and New Zealand dollar/U.S. dollar.

5, What is a currency carry trade?

A trader buys one currency that has a high interest rate with another currency that has a lower interest rate. It’s the most popular trade on the currency market, but its declines can be rapid and severe when a majority of speculators decide a carry trade has poor potential and they try all at once to exit their positions.

 

Emerging Currency Markets

5 Emerging Markets Currencies to Consider in 2016
By Anthony Jerdine| March 13, 2016

The currencies of the world’s leading emerging economies have been in a tailspin for years. The Chinese renminbi, Indian rupee, Russian ruble and Brazilian real each declined by more than 20% between 2012 and 2015. This is one of the reasons why the U.S. dollar experienced a resurgence in global markets despite the Federal Reserve’s massive quantitative easing programs.

Another result of the Fed’s easy money policy was ultra-low interest rates between 2007 and 2015. Income investors looked away from traditional savings vehicles, such as Treasury bonds and certificates of deposit (CDs), in favor of stocks and high-yield bonds.

There was a time when emerging market debt was considered an attractive investment. Bonds in Indonesia, Brazil and Russia were once considered winners thanks to high nominal returns, but the catastrophic inflation in these countries transformed their bonds into big-time losers. The situation was even worse in Argentina, which is now shut out of bond markets, and Venezuela.

What Makes a Currency Appreciate?
Currencies trade in relative prices in international markets because the world theoretically operates through a floating exchange-rate regime. If the U.S. dollar loses 2% of its purchasing power while the Russian ruble loses 5% of its purchasing power, then the dollar is supposed to appreciate, or strengthen, against the ruble. American investors should try to find emerging market currencies that are not going to lose as much purchasing power as the dollar in 2016.

There are two ways a currency becomes more valuable. The first is a reduction in the currency’s circulation. If fewer yuan are floating around the international system, that means each remaining yuan becomes that much more valuable as the supply shrinks. The second is an increase in the home economy’s labor productivity. For example, Russia is an oil-rich nation, and the ruble should become relatively more valuable if Russian oil exporters become more productive.

Strong currencies raise incomes, help bondholders and make it easier to afford foreign goods. On the other hand, a rising currency means it is probably more difficult to pay off debt or sell in foreign markets. Hold currencies, or assets denominated in currencies, will hold the most value in the long term.

1. Poland: The Złoty
Poland’s economy entered 2016 with as much momentum as any other European nation, with the last quarter expected to be the most robust in nearly five years. The country’s labor market is strong and business confidence is rising. The combination of low inflation, impressive domestic demand and increasing productivity has led to an expectation that the Polish złoty will rise throughout 2016.

2. South Korea: The Won
South Korea has one of the most fundamentally sound and productive economies in the Asia-Pacific region. The Korean won lost nearly 15% against the U.S. dollar since its peak in early 2014. Low debt-to-GDP figures for the South Korean government should alleviate pressures to print lots of new money.

3. Hungary: The Forint
Hungary currently has low interest rate problems, and there are many underlying economic concerns. The Hungarian forint has performed admirably in forex markets since mid-2012 and could experience inflows from investors running from India and Russia.

4. Indonesia: The Rupiah
The Indonesian rupiah is a momentum play and not backed by serious fundamentals, or at least not compared to the forint, won or złoty. It was trading at record lows against the dollar before rebounding significantly at the end of the year. This is a currency to keep an eye on, especially if commodity prices rebound.

5. India: The Rupee
The rupee is a riskier bet than other emerging market currencies because of India’s problems with inflation and uncertain monetary policy. The Indian government is torn between fighting high prices and trying to devalue to promote Keynesian-style growth programs. However, the rupee outperformed virtually every other emerging market currency on a risk-adjusted basis in 2015 due to its high interest rates. The rupee offers a 7.5% deposit rate for 2016.

5 Emerging Markets Currencies to Consider in 2016

Why is the Chinese Yuan Pegged?

Why Is the Chinese Yuan Pegged?
By Anthony Jerdine|Updated March 08, 2016

The Chinese yuan has had a currency peg for years. This approach makes Chinese exports cheaper and, therefore, more attractive relative to those of other nations. By providing the global marketplace with greater motivation to buy its goods, China can help ensure its economic prosperity.

As long as a currency peg keeps the yuan low relative to other currencies, consumers using foreign currencies can buy more of China’s exports than they would if the yuan was more expensive. For example, if the People’s Bank of China keeps the yuan weak compared to the U.S. dollar, consumers using the greenback can buy more Chinese exports than they would otherwise.

Exports are a major driver of any economy, as they represent money flowing into a nation. To keep the yuan artificially low and support robust export activity, the People’s Bank of China engages in currency purchases. As a result, the central bank’s foreign exchange reserves (minus gold) surged from roughly $600 billion in December 2004 to $3.8 trillion in December 2014.

Economic Boom
This currency manipulation has helped China thrive, as the nation’s economy has repeatedly experienced robust growth rates of more than 10% over the last decade. China’s industrial sector has done particularly well, as it became the world’s largest manufacturer in 2011, according to a McKinsey report.

This first-place status has signaled a significant increase compared to its seventh-place status as recently as 1980, the report adds. Because of this robust growth, China doubled its gross domestic product (GDP) per capita over the course of a decade, a feat that the industrialized United Kingdom completed over a stretch of 150 years.

This rapid expansion has helped China grab a 23.2% share of global value-added manufacturing as of 2013, according to U.N. estimates reported on by Manufacturers Alliance for Productivity and Innovation.

Costs and Benefits
While these facts and figures may sound great for China, not everyone is optimistic about the situation. U.S. manufacturers and workers have complained about the Chinese trade surplus, claiming that the yuan peg has granted Chinese companies an unfair advantage, according to a Congressional Research Service report. As a result, U.S. lawmakers have called for revaluing China’s currency.

While opponents of yuan pegging have complained, they may be providing an overly simplified portrayal of the situation. An artificially low yuan is not without its benefits. The currency peg means cheap Chinese goods for U.S. consumers, a development that can help keep overall inflation at a modest level.

The benefits of these less expensive goods also extend to businesses. U.S. companies that use less expensive imported items from China to make goods can enjoy reduced costs of production. By lowering these expenses, such firms can either lower the prices for consumers or increase their profitabilities, or both.

Chinese trade deficits also provide a boon to the broader economy, as they necessitate the movement of capital to the United States from China, the Congressional Research Service report noted. If this foreign capital goes toward purchasing interest-bearing securities, such as U.S. Treasurys, this development would help to place downward pressure on borrowing costs and encourage stronger investments. In addition, lower interest rates are considered to support economic growth.

The Bottom Line
Pegging the yuan is a strategic policy move that provides crucial benefits to the Chinese economy. Using this approach, the People’s Bank of China can make Chinese exports more appealing on the global marketplace and help fuel greater prosperity for China. While many governments harness expansionary policies in the hope that they will generate the intended results, China has proved the efficacy of its currency peg over many years.

 

Chinese Yuan Pegged?