Title: Why Trade in Forex Markets?

So you want to get into foreign exchange (“forex”) trading? This is understandable
since forex is the biggest action on earth, bar none. In mid-2006, International
Financial Services, London (IFSL) estimated that daily turnover in just the major
trading centers – London, New York, Tokyo and Singapore – averaged some
U.S.$2.9 trillion. By comparison, turnover in stock markets around the globe amount
to less than a tenth. And the 62 casinos in Las Vegas and Macau combined had a
gross take of less than $14 billion in 2006. Here is how you can get in on the action.

Where do you go to participate? Well, first of all, there is no bricks-and-mortar

central exchange like the London Stock Exchange, the New York Stock Exchange or
the Chicago Board of Trade (for commodities). The forex market is widely dispersed
through thousands of storefront money changers (the “over-the-counter” or OTC
market) and banks trading with each other.

Most of the world’s leading currencies are valued relative to each other, to the U.S.
dollar, to be more specific. It is no wonder then that exchange rates and where they
are headed attract so much attention from heads of governments, central banks,
importers and exporters. Every newspaper business page contains a forex bulletin
each weekday and entire TV broadcasts are devoted to the standing of major
currencies.

The investment and speculative opportunities for buying one currency or selling
another occur because virtually every currency follows a “floating rate”, not fixed,
regimen. That is, on any given day, hour or minute, exchange rates are determined
by supply and demand. Market psychology, economic factors and political
developments influence exchange rates one way or the other.

So where does one go to participate in the forex market? At the simplest level, one
can “buy” a favored currency from a money changer or bank, take “physical delivery”,
store it in a strongbox at home or in a foreign currency deposit account, then sit
back and wait for it to rise in value versus another currency over a period of weeks
or months.

One could leave management of a more varied currency basket, to trade reactively
or speculatively to the traditional channels: investment and commercial banks,
money portfolio managers, and money brokers. Then your account will have to
compete with those of corporations and wealthy individuals for proper attention.

If one had known in the third quarter of 2006, for example, that the Philippine
government would announce highly positive economic fundamentals and a record-
setting invisibles inflow by Christmas, going short on the U.S. dollar-Phil peso rate
would have ridden a full 10% appreciation by New Year’s Day 2007. And if one had
speculated that mixed news on the economic front would hurt the U.S. dollar, buying
$1 million worth of euros on April 3, 2007 would have earned a profit of close to
$30,000 by month’s end or an annualized return of about 25%.

Holding on to a favored mix of currencies over a period of time takes steel nerves,
however, because numerous market sentiment, political and economic factors
introduce great volatility in forex rates. In the interbank market, traders “take
positions on” (buy and sell) a given currency pair like the dollar and the euro dozens,
even hundreds of times a day.

For now, you have learned that the forex market represents awesome trading
potential. Like the stock market, currency markets let you profit on both good and
bad news. Fortunately, there are various institutions that can help you open and
manage an account.

Summary:
The international foreign exchange market is, in point of daily volume, the biggest
action arena of them all. How does it work and what do you do to get in on the
action? This article starts you on the road to more informed investment decisions.

Title: Forex Trading for the Sophisticated Investor

Sooner or later, every high-asset investor participates in the equities, bonds and
commodities markets or at least seriously considered these choices. Currency
trading seems more arcane but bears adding to the portfolio.

Money is fascinating in and of itself. In addition, however, foreign exchange trading

catapults the savvy investor to the realm of international import-export transactions
and investment flows. Hence the volumes are huge, reliably estimated as close to
$3 trillion every single trading day. Hence, the opportunity for profits is immense.
But so is the downside, if ill-considered placements are made.

Setting aside market sentiment, one makes better-informed decisions based on the
political developments and economic indicators that are reported for each country in
a currency pair. Herewith a syllabus of sorts for Political Economy 101.

If you want to take a position on the dollar vis-à-vis the renminbi, for instance, you
must pay attention to the growth of gross domestic product (GDP) in both China and
the United States. GDP is a quick read on how well the economy of any nation is
growing. Usually reported as a quarterly or annual growth rate, GDP is the sum total
of wealth-producing activities in agriculture, industry and services.

The more consistently an economy expands and, within limits, the faster it does, the
stronger will consumer confidence be and the firmer the belief of fund managers in
one or both of the currencies in the forex pair. As well, economic growth implies
capital inflows by investors interested in capitalizing on growth opportunities, thereby
firming up that country’s capital account and foreign reserves. Among other things,
the foreign reserve of trading partner currencies is a bulwark against speculation
designed mainly to put the dollar or renminbi in play.

In turn, accelerated investment boosts employment and increases demand for raw
materials and services, a cycle that strengthens the prospects for continued growth
down the road.

On the demand side, GDP reportage might reveal the status of personal consumption
expenditures. Together with government outlays and total investment activity,
consumer spending is the engine that drives economic activity. The well-informed
forex investor may hear or read bits and pieces of the consumer spending
panorama: housing starts, car sales, sales ex-manufacturer and in-store, purchases
of luxury goods. What matters is putting all these together into a coherent reading
of consistent growth in consumer spending.

In medium-size or developing economies, consumer spending has the additional

value of giving the investor a solid clue whether domestic demand is growing fast
enough to offset over-dependence on exports.

Interest rates comprise a fifth indicator. When the Fed (or other central monetary
authority) decides to raise bank reserve requirements, money supply shrinks and
interest rates rise. Or interest rates might be used to hold inflation in check. So a
Tokyo fund manager dissatisfied with the 1% interest on his yen deposits might
decide to park his funds in U.S. 2-year bonds which bear a coupon rate of 4.5% and
on which the yield has risen lately. All other things equal, such thinking would
strengthen the dollar and weaken the yen.

On another level, dissatisfaction with interest rates may spotlight the gains to be had
in forex trading. Correctly guessing that mixed news on the economic front would
hurt the U.S. dollar, buying $1 million worth of euros on April 3, 2007 would have
earned a profit of close to $30,000 by month’s end or an annualized return of about
25%.

At the end of the day, one can expect capital gains in forex trading by attending to
political economy factors such as GDP, interest rates, consumer confidence and
spending.

Summary:
This article explains why certain political economy fundamentals are vital to
understanding the state of a country and its currency relative to another. Learn
what are the essential developments that strengthen or weaken a currency and
invest more rationally.

Title: Why the Euro Gained Primacy

Since its launch in 1999 as accounting currency and distribution as physical coins and
banknotes just five years ago, the Euro has appreciated against the U.S. dollar,
become the currency of choice for international financing instruments, and grew to
be the second most actively-traded currency, after the U.S. dollar, in forex markets.
It is not enough for detractors to claim that sheer force of habit by a continent-wide
mass of people has kept the Euro prominent. The vitality of the Euro zone
economies, development of more sophisticated financial intermediaries and greater
liquidity are equally important.

The tremendous size, diversity, dynamism and openness of the Common Market
economies invite equally brisk trade and significant capital inflows. Given a
population that is at least 50% bigger than that of the U.S.A., gross domestic
product at least as large and managed in open, democratic fashion, the EU can
obviously wield great economic influence on a global scale.

True, recent economic growth has been diluted somewhat by counting the accession
nations and others waiting in the wings. Compared to economic growth that
averaged 5.7% in the rest of the world, the Euro zone was positively sluggish in
typically expanding at just over 1% over 2003 to 2005.

The influence of the Euro can only continue to grow, however, as the EC countries
individually and collectively strive for structural reforms, reduce or take down
subsidies, otherwise improve productivity, and rein in fiscal deficits.

Secondly, more predictable price levels in the EU countries and a fairly steady
exchange rate reduces intermediation costs and risk. Financial markets can accept
euro-denominated debt instruments with greater confidence on what the conversion
and payoff outcomes will be months or years down the road. Political will exercised
by the member-countries aside, the terms of the Maastricht Treaty did empower the
European Central Bank (ECB) with the autonomy and authority to keep inflation in
check. The record of the ECB in this respect has been enviable. Inflation has been
manageably low and the exchange rate of the Euro has, except in recent weeks
when appreciation was the norm, stayed within very narrow bands.

Yet a third factor that explains the current preeminence of the Euro is the
diversification and integration of financial markets on the continent.

Long-running enmities die hard. Compared to the U.S. experience, banks historically
monopolized financial markets in the Euro zone. And before the Common Market
and currency integration came into being, the financial sector in each country was
more prone to compete, rather than cooperate, with cross-border rivals.

Since the mid-1980s, however, financial systems have evolved and become more
sophisticated. The adoption of the Euro and, in 2000, the Financial Services Action
Plan (FSAP) were important milestones. Specifically, the FSAP bound the member-
countries to eliminate regulatory and market barriers. Providing and accessing
financial services regardless of national borders induced the free flow of capital and,
by racheting up competition, introduced more efficient financial markets.

Concretely, the favorable developments have included more liquid bond markets, a
narrower range of sovereign interest rates, and financial instruments that became
more creative but also more complex. The stock markets have also benefited.
Investors seem better-prepared to focus on company and industry news rather than
on how market sentiment or political economy differ country by country. There is
greater consistency in stock prices across the major bourses and EC-wide funds have
gained a better equity markets.

All in all, the current strength of the Euro can be attributed to the great size,
industrialization and openness of the Common Market itself, as well as stable prices,
intermediation costs and exchange rates.

Summary:
The Euro has been catapulted to center stage on global forex markets. For one, it is
now the leading currency in which international bonds are denominated. This article
spotlights the fundamental reasons why.