4 Currencies You Need to Keep a Close Eye on

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There have been two key developments for currency markets in the past. The dollar has been advancing relentlessly against every major currency, and it has mainly been rising against currencies of commodity exporters. Next, the yuan had a surprising devaluation over the summer that led to a short and sharp correction in global equities.

 

Since global markets are having their worst start to the year in a long time after China devalued the yuan again in the first week of January, 2016 you can expect turmoil in the currency markets. With that in mind, here are four currencies to keep a close eye on in the new year:

 

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Chinese Yuan

Even though the dollar seems to be a force to be reckoned with, in recent months the Chinese yuan has been disrupting the currency markets. The yuan isn’t a floating currency whose rate is determined by market forces. China’s central bank, the People’s Bank of China (PBOC), uses a “managed float” system to determine its rate against a basket of managed currencies including the U.S. dollar.

 

China had been allowing the yuan to appreciate gradually over the past 10-year period ending in 2014. This was in part respondent to blatant calls from U.S. lawmakers for the revaluation of the yuan in order to curb the nation’s soaring trade deficit with China.

 

However, since the yuan reached its strongest level ever, of six yuan to the dollar, in January 2014, it has been allowed to slide lower as the dollar runs up.

 

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Canadian Dollar

The Canadian dollar, or “loonie” as it is known in the world of forex, plummeted 16% in comparison to the dollar in 2015. It was the third worst performing of the 16 major currencies, topping out a three-year slide to a record 28%.

 

The Canadian dollar’s plunge was caused by a few bearish factors including a recession in Canada in the first half of the year, slowing global growth, two interest rate cuts by the Bank of Canada, lower commodity prices and finally, a 30% drop in crude oil prices.

 

In 2016, the drag created by these factors could ease up and the Canadian economy is expected to benefit from the monetary and fiscal stimulus and a weak currency. Other areas that may prove beneficial to the currency include the strength in other parts of the world like Europe and Japan could offset the slowdown.

 

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Euro

The euro came under speculative attack in the first part of 2015, because of the crisis in Greece brought up concerns about the currency once again. After the unexpected devaluation of the yuan in August, the euro had to give up its standing on the world stage, forcing it to end down 10.2% vs. the dollar for the year.

 

While some currency traders think the euro could fall to parity with the U.S. dollar in 2016, Bloomberg survey participants forecast only a modest weakening in the currency this year, to 1.06 from its current level of 1.08.

 

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Brazilian Real

In 2015, the Brazilian real was the worst-performing of the major currencies, plunging 33% against the U.S. dollar, and bringing its decline against the dollar since 2010 to a surprising 58%.

 

The currency reached a record low of 4.25 against the U.S. dollar in September after Standard & Poor’s cut Brazil’s credit rating to junk amid a deep recession, political stalemate and a widening corruption probe into state-owned oil company Petrobras.

 

With the continued waning of business and consumer confidence, and Brazil’s equity index near a seven-year low amid a global sell-off in the first week of January, the real may be difficult to recover in 2016. The currency could, in fact, trade at new lows if commodity and energy prices continue to tumble in 2016.

 

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These four currencies will be the center of attention in the coming year with the Chinese yuan mainly in the focus of currency traders.

 

Thank you for taking the time to visit my blog. If you enjoyed this article, let me help you with any of your professional content needs including original blog articles, website content and all forms of content marketing. Please contact me at michael@mdtcreative.com and I will put my 15+ years of experience to work for you.

Foreign Currencies Traded the Most by Americans

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With transactions totaling over $4 trillion every day, the foreign exchange market (FOREX) is the world’s largest publicly traded market. The majority of transactions are done by businesses including corporations, mutual funds, pension funds, hedge funds, banks and insurance companies.

 

However, every year, individual Americans buy hundreds of millions of dollars’ worth of foreign currencies, mainly for overseas travel and purchases.

 

Over the past year, the U.S. dollar has strengthened substantially against most major currencies. This makes foreign travel cheaper and more attractive, while stretching the value of money overseas.

 

This also makes trading in FOREX much more attractive for Americans as well because the U.S. dollar can buy more of the currencies issued by countries with weaker economies then the U.S.

 

There are several reasons for the strengthening of the dollar, however, the main ones include relatively strong growth in the United States compared with the rest of the world, combined with efforts by foreign governments to weaken their currencies in order to boost exports.

 

Here are five of the currencies Americans are purchasing and trading the most in:

 

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Mexican Pesos

Over the past 12 months the peso has weakened by more than 22% against the dollar, reaching a high of 17.3 pesos per dollar on August 24. The currency is the eight-most actively traded in the world.

 

This is driven by Mexico’s status as a major non-OPEC oil producer and its close proximity to the United States. leading to American’s making an estimated 21 million trips to Mexico in 2015.

 

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Canadian Dollars

Over the past year, the Canadian dollar has weakened by almost 15% over the past year. This is due in large part to the weakness in the price of oil, a key Canadian export. Traders now get more than 1.3 Canadian dollars to one U.S. dollar, compared with 1.12 a year ago and 0.95 in July 2011.

 

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Euros

The top travel destinations for Americans are France, Italy, Germany and Spain and they are among the 19 members of the European Union that uses the euro as their official currency. Over the past year, the Euro has weakened by 16%, as the economic strength in Germany has been offset by the continuing problems in a number of the southern European countries, especially Greece.

 

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British Pound

The British Pound has only declined by around 3% against the dollar over the past year, reflecting a relatively strong economy and stable interest rates. Roughly 2.5 million Americans visit Great Britain, including Scotland, Wales and Northern Ireland every year.

 

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Japanese Yen

The Japanese Yen has also only declined by about 3% over the past year against the dollar, however, it’s down nearly 43% over the past five years. This reduction in cost to Americans has been a major boost to Japan’s tourism economy. Another reason tourism has been booming in Japan is the reduction in fear over the effects of the 2011 radiation leak in Fukushima following the earthquake and tsunami.

The Foreign Currencies Americans Trade Most

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With transactions totaling over $4 trillion every day, the foreign exchange market (FOREX) is the world’s largest publicly traded market. The majority of transactions are done by businesses including corporations, mutual funds, pension funds, hedge funds, banks and insurance companies.

 

However, every year, individual Americans buy hundreds of millions of dollars’ worth of foreign currencies, mainly for overseas travel and purchases.

 

Over the past year, the U.S. dollar has strengthened substantially against most major currencies. This makes foreign travel cheaper and more attractive, while stretching the value of money overseas.

 

This also makes trading in FOREX much more attractive for Americans as well because the U.S. dollar can buy more of the currencies issued by countries with weaker economies then the U.S.

 

There are several reasons for the strengthening of the dollar, however, the main ones include relatively strong growth in the United States compared with the rest of the world, combined with efforts by foreign governments to weaken their currencies in order to boost exports.

 

Here are five of the currencies Americans are purchasing and trading the most in:

 

Mexican Pesos

Over the past 12 months the peso has weakened by more than 22% against the dollar, reaching a high of 17.3 pesos per dollar on August 24. The currency is the eight-most actively traded in the world.

 

This is driven by Mexico’s status as a major non-OPEC oil producer and its close proximity to the United States. leading to American’s making an estimated 21 million trips to Mexico in 2015.

 

Canadian Dollars

Over the past year, the Canadian dollar has weakened by almost 15% over the past year. This is due in large part to the weakness in the price of oil, a key Canadian export. Traders now get more than 1.3 Canadian dollars to one U.S. dollar, compared with 1.12 a year ago and 0.95 in July 2011.

 

Euros

The top travel destinations for Americans are France, Italy, Germany and Spain and they are among the 19 members of the European Union that uses the euro as their official currency. Over the past year, the Euro has weakened by 16%, as the economic strength in Germany has been offset by the continuing problems in a number of the southern European countries, especially Greece.

 

British Pound

The British Pound has only declined by around 3% against the dollar over the past year, reflecting a relatively strong economy and stable interest rates. Roughly 2.5 million Americans visit Great Britain, including Scotland, Wales and Northern Ireland every year.

 

Japanese Yen

The Japanese Yen has also only declined by about 3% over the past year against the dollar, however, it’s down nearly 43% over the past five years. This reduction in cost to Americans has been a major boost to Japan’s tourism economy. Another reason tourism has been booming in Japan is the reduction in fear over the effects of the 2011 radiation leak in Fukushima following the earthquake and tsunami.

 

Thank you for taking the time to visit my blog. If you enjoyed this article, let me help you with any of your professional content needs including original blog articles, website content and all forms of content marketing. Please contact me at michael@mdtcreative.com and I will put my 10+ years of experience to work for you.

What are the Risks Involved in Forex Trading?

What are the Risks Involved in Forex Trading

 

There seems to be some confusion about the risks involved in trading currencies. There has been a lot of conversation about the interbank market being unregulated and therefore very risky because of the lack of oversight. This statement isn’t completely true.

 

A better approach to the discussion of risk would be to understand the differences between a decentralized market versus a centralized market and then determine where regulation would be appropriate.

 

The interbank market is made up of several banks trading with each other around the world. The banks themselves have to determine and accept sovereign risk and credit risk. This is why there are several internal auditing processes that keep them as safe as possible. The regulations are industry-imposed for the sake and protection of each participating bank.

 

Since the market is created by each of the participating banks which provide offers and bids for a particular currency, the pricing mechanism of the market is created by supply and demand. Due to the huge flows within the system it is almost impossible for a rogue trader to influence the price of a currency.

 

Because of the high volume of trading in the market today, with between two and three trillion dollars being traded every day, even the central banks can’t move the market for any length of time without the full coordination and cooperation of other central banks.

 

An ECN (Electronic Communication Network) is currently in the works which will bring buyers and sellers into a centralized exchange so that pricing can be more transparent. This will be a positive move for retail traders who will gain a benefit by seeing more competitive pricing and centralized liquidity.

 

This issue of course doesn’t apply to banks which is why they can remain decentralized without it creating any issues for them. Traders with direct access to the forex banks are also less exposed than those retail traders who deal with relatively small and unregulated forex brokers, who can and sometimes do re-quote prices and even trade against their own customers.

 

The discussion of regulation has come up because of the need to protect the unsophisticated retail trader who has been led to believe that trading forex is a surefire profit-making market.

 

For the serious and educated retail trader, there is now the opportunity to open accounts at many of the major banks or the larger more liquid brokers. As is the case with any financial investment, it pays to remember that nothing is guaranteed so that is why education, caution and common sense needs to be applied when trading in the forex market.

 

Thank you for taking the time to visit my blog. If you enjoyed this article, let me help you with any of your professional content needs including original blog articles, website content and all forms of content marketing. Please contact me at michael@mdtcreative.com and I will put my 10+ years of experience to work for you.

The Different Ways to Trade Currencies

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Along with choosing a trading strategy and a currency pair, investors also need to choose a market in which to trade currencies. There are several different markets available to trade currencies including the forex market, derivatives markets and exchange-traded funds. Here is a brief description of each market.

 

Forex Trading

A majority of currency trading takes place in the forex spot market. In this market, large banks and other financial institutions trade currencies among themselves either for immediate delivery (spot market) or for settlement at a later date (forward market).

 

Trades in the forex market occur over the counter, and the minimum size of the trades is very large. In the past it has been impractical for individual investors to trade in the forex market for these reasons.

 

However, over the past several years, a new retail forex market has developed. This market allows individual investors and small institutions to trade in the forex market with smaller volumes than those that were previously available.

 

Derivatives Markets

Derivatives include futures, options and exotic, customizable derivative contracts. The more exotic derivatives are usually designed for institutional investors, while individual investors often trade futures and options.

 

The most popular currency pairs have both futures contracts and options on those futures contracts. Individual investors are able to buy or sell the futures or the options to speculate on the direction of the currency pair. These futures and options usually feature reasonably good liquidity, transparent pricing and moderate capital requirements.

 

For these reasons, futures or options are a viable choice for individual investors interested in the currency market.

 

When using futures or options, it’s very important to understand the risks involved in using these financial instruments. Even though large gains are possible, the majority of investors using these securities eventually lose money. Futures contracts also carry the possibility of potentially unlimited losses.

 

Investors should carefully consider their risk tolerance and thoroughly understand potentially adverse price movements, before considering a futures trading strategy.

 

Exchange Traded Funds (ETFs)

ETFs have been popular vehicles for tracking stock and bond indexes for years, however, they are a relatively new addition to the world of currency trading. A currency ETF can be bought and sold just like any other stock.

 

An investor who believes a currency is about to rise in price should buy the ETF. On the other hand, an investor who believes a currency will decline in value should sell the ETF.

 

An advantage to trading ETFs is that they are more familiar to the average investor than the forex or derivatives markets. ETFs also carry stricter margin requirements, so they may appeal to more risk-averse investors.

 

Thank you for taking the time to visit my blog. If you enjoyed this article, let me help you with any of your professional content needs including original blog articles, website content and all forms of content marketing. Please contact me at michael@mdtcreative.com and I will put my 10+ years of experience to work for you.

Frequently Asked Questions About Forex Trading

Frequently Asked Questions About Forex Trading

 

Even though the forex market is the largest financial market in the world, it is still pretty confusing to retail traders. Up until the internet made currency trading popular a few years ago, FX was usually only traded by large financial institutions, multinational corporations and hedge funds.

 

However, more and more investors are becoming more familiar with this fascinating market. That’s why we put together the answers to some of the top questions about the forex market.

 

What makes the forex market different from other markets?

Unlike stocks, futures or options, currency trading isn’t done on a regulated exchange. It’s not controlled by a central governing body, there aren’t any clearing houses to guarantee the trades and there isn’t any arbitration panel to settle disputes.

 

Members trade with each other based on credit agreements. Basically, transactions in the largest, most liquid market in the world depends on nothing more than a verbal agreement. This is why it’s crucial to always deal with only reputable retail FX dealers.

 

Does forex trading have commission fees?

Investors who trade stocks, futures or options usually use a broker, who acts as an agent in the transaction. For the task of taking the order to an exchange and attempting to execute the trade, using the customer’s instructions, the broker charges a commission.

 

The FX market doesn’t have commissions because it’s a principals-only market. FX firms are dealers, not brokers, which is a critical distinction. They make their money through the bid-ask spread.

 

The bid-ask spread is the difference in price between the highest price that the buyer is willing to pay and the lowest price the seller is willing to sell it for. Everything above the purchase price is profit.

 

What is a pip?

A pip is the “percentage in point” and is the smallest increment of trade in FX. In the forex market, prices are quoted to the fourth decimal point. The change in that fourth decimal point is call 1 pip and is typically equal to 1/100th of 1%.

 

What are you really buying and selling In the currency market?

In the FX market you’re basically buying and selling nothing at all, because it is purely a speculative market. There isn’t any physical exchange of currencies ever. All trades exist only as computer entries and are netted out depending on the market price.

 

What is a currency carry trade?

The most popular trade in the currency market is a carry, which is practiced by both the largest hedge funds and the smallest retail speculators. The carry trade rests on the fact that every currency in the world has an interest rate attached to it. These short-term interest rates are set by the central banks of the Federal Reserve in the U.S., the Bank of Japan in Japan and the Bank of England in the U.K.

 

The idea behind the carry is pretty straightforward. The trader goes long the currency with a high interest rate and finances that purchase with a currency with a low interest rate.

 

Forex trading can be fascinating and profitable, however, you need to have a clear understanding of how it works and how to trade so that you can make as much of a profit as possible, rather than losing your principal.

 

Thank you for taking the time to visit my blog. If you enjoyed this article, let me help you with any of your professional content needs including original blog articles, website content and all forms of content marketing. Please contact me at michael@mdtcreative.com and I will put my 10+ years of experience to work for you.

Forex Trading Strategies

Forex Trading Strategies

 

There are a variety of currency trading strategies available. However, most of the strategies fall into one of two broad categories: hedging and speculating.

 

Hedging

When companies sell goods or services in foreign countries, they are normally paid in the currency of the country in which the sale occurs. However, currencies continually fluctuate, causing the sale to be valued (in the home country) at less than hoped for or expected profits.

 

However, companies can hedge, to avoid possible losses from fluctuating currencies by trading currency pairs. Protection against the possibility of adverse currency movements helps companies focus on generating revenues without worrying about loss in value.

 

Speculating

Other investor activities will fall under the broad category of speculation, which involves buying or selling a financial asset. This is usually done with expected higher-than-ordinary risk, in order to take advantage of an expected move.

 

Speculators in the currency market wager that, in the future, the value of a currency will move higher or lower relative to another currency. Speculators in the currency market can include hedge funds, commercial banks, pension funds or investment banks, in addition to individual investors.

 

Currencies are traded in pairs, so in any given transaction, a trader is wagering that one currency will rise, while the value of the second will fall.

 

Additional trading strategies

 

Beside the trades that focus on the relative value between two currencies, there are several other popular types of currency trades. Arbitrage trades are trades where the investor simultaneously buys and sells the same currency at slightly different prices, in the hopes of making a small, risk-free profit.

 

Even though this is a very attractive and prefered trading strategy, arbitrage opportunities are very rare in efficient markets because there are many other investors who are also watching out for these opportunities. This means that any arbitrage possibilities that do exist disappear quickly.

 

Investors who are interested in arbitrage opportunities need to monitor market developments closely and when the opportunity appears, they need to act quickly. When the opportunities do appear, the price differential is usually very small. To generate a substantial profit, investors need to trade in large enough quantities to increase their profits.

 

Another popular currency trading strategy is the carry trade. This strategy involves selling the currency of a country with interest rates that are very low and investing the proceeds in the currency of a country with high interest rates. This strategy allows the trader to generate a profit as long as the relationship between the two currencies is relatively stable.

 

The carry trading strategy is usually performed by large, sophisticated investors, like hedge funds, and is extremely popular during times of low market volatility. During high volatility, large fluctuations in the value of currencies and other financial assets can quickly overwhelm the traditionally slow-and-steady profits found in the carry trade.

 

Thank you for taking the time to visit my blog. If you enjoyed this article, let me help you with any of your professional content needs including original blog articles, website content and all forms of content marketing. Please contact me at michael@mdtcreative.com and I will put my 10+ years of experience to work for you.