The Sterling Advances Against The Dollar As Stocks Advance

The pound climbed for a third day against the dollar, as the longest run of stock gains in two months underpinned demand for the British currency. However gains by the pound may be limited as an industry report showed house prices slid almost 15 percent in the year and a Bank of England policy maker David Blanchflower said interest rates need to fall 'significantly.' 'Interest rates do need to come down significantly - and quickly,' Blanchflower said in a speech at the University of Kent in Canterbury, England, yesterday. 'If rates are not cut aggressively we do face the prospect of a relatively deep and long-lasting recession.' The GBP/USD is currently trading at $1.6580 as of 8:41am, GMT.

The dollar and the yen fell as a wave of global interest-rate cuts sparked a rally in Asian stocks, bolstering demand for higher-yielding assets. The greenback slid for a third day against the euro after the Federal Reserve reduced its target lending rate to the lowest in half a century. The yen dropped to a one-week low versus the European currency on speculation the Bank of Japan will lower borrowing costs when it meets tomorrow. 'The significant easing of monetary policy will help the global growth outlook,' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group in Sydney. 'We're seeing a major correction of the U.S. dollar and Japanese yen. They were among the key beneficiaries of the flight to quality that's being unwound.' The USD/JPY is currently trading at 98.35 as of 8:50am, GMT.

The dollar could rise to parity with the euro in 2009 as the European Central Bank cuts interest rates and market volatility prompts U.S. investors to repatriate funds and hedge their currency risks. Given the increased volatility in currency and equity markets, 'the need for U.S. equity managers to think about their currency risk in a more systematic way is rising fast,' wrote Metcalfe. 'Following both repatriation and hedging flows at present, suggests that U.S. dollar strength is set to continue.' The EUR/USD is currently trading at $1.6559 as 9:06am, GMT

Economic Calendar

Time (GMT)	E Event	Currency	Period	Previous
23:30	Household Spending y/y	JPY	Sep	-4.0%
23:30	Core CPI y/y	JPY	Oct	1.7%
23:30	Unemployment Rate	JPY	Sep	4.2%
23:15	Manufacturing PMI	JPY	Oct	44.3
12:30	GDP q/q	USD	Quarterly	2.8%
12:30	Jobless claims	USD	Weekly	478.0K
10:00	Consumer Confidence	EUR	Oct	-19
09:00	Unemployment Rate	EUR	Oct	7.6%

USD Reversal Generates Strength for Most of the Majors

Daily Forex Technicals | Written by FOREXYARD | Oct 30 08 |

USD Reversal Generates Strength for Most of the Majors

Yesterday's interest rate cut by the U.S. Federal Reserve has made the USD drop in value across the board. The Dollar was already beginning to trade above $1.3200 per EUR in today's early trading sessions, after dropping 2.2 % yesterday, and has also climbed above 1.6500 against the GBP. Crude Oil prices have also begun to reach back up to the $70 price level!

Market Trend

	EUR/USD	GBP/USD	USD/JPY	USD/CHF	AUD/USD	EUR/GBP
Daily Trend
Weekly Trend
Resistance	1.3300	1.6715	99.90	1.1400	0.6956	0.8060
	1.3260	1.6680	99.56	1.1365	0.6925	0.8024
	1.3215	1.6635	99.15	1.1320	0.6880	0.7975
Support	1.3120	1.6524	98.00	1.1218	0.6800	0.7900
	1.3085	1.6490	97.60	1.1185	0.6777	0.7876
	1.3049	1.6470	97.35	1.1155	0.6729	0.7845

Economic News

USD - Interest Rate Cut Creates Massive One-Day Loss for USD

In a move anticipated by most market analysts, the Federal Reserve cut target lending rates yesterday to a level not seen in almost 50 years! This was done in an attempt to prevent a widening financial crisis from tipping the U.S. economy into a prolonged recession. It was not the first time the Fed cut rates to stave off further economic disaster during these most recent times of financial hardship.

Less than a month ago the Fed joined the European Central Bank (ECB), as well as other counterparts from the U.K., Canada, Sweden and Switzerland, in a coordinated reduction of interest rates, cutting its target rate by a half percentage point to 1.50%. Now, as a result of yesterday's further rate cut, the Dollar posted its biggest one-day fall against almost all of its major currency counterparts.

The Dollar was already beginning to trade above $1.3200 per EUR in today's early trading sessions, after dropping 2.2 % yesterday, and has also climbed above 1.6500 against the GBP. The Fed may also be expected to lower benchmark interest rates even further in the coming months given the downbeat economic outlook provided by the Fed's policy statement yesterday.

The market has been trading on a recovery theme lately; there is still a lot of uncertainty, and risk aversion is very much in place. If risk appetite continues improving, the Dollar may get even weaker. Despite showing signs of recession in the U.S. economy, the Fed's maneuver put the focus on the interest rate differential, and that might force the Dollar to go even lower no matter how the Advanced GDP figures appear when they are released later today.

EUR - EUR Finds its Strength from Weakened USD

The EUR rose against the Dollar to 1.3200, marking a distinct rebound from last week's doldrums. The 15-nation currency rallied after the U.S. Federal Reserve slashed its target rates by half a percentage point yesterday and also left the door open to further reductions if needed. The EUR made further gains following Germany's announcement of its preparation of an economic stimulus package. Deutsch Bank AG, the largest bank in Germany, also declared surprising profits after implementing a change to its accounting rules.

The USD no longer appears to be a save-haven for traders after the Federal Reserve released a statement that the pace of economic activity appears to have slowed significantly. The British Pound has also advanced against the Dollar as a report showed that mortgage approvals rose for the first time since June 2007.

The Bank of England (BoE) said lenders approved 1,000 more home loans last month than in August, and the government is expected to pledge extra borrowing today to support the economy as it enters its first recession since 1992. The Pound had its biggest intra-day decline versus the Dollar on Oct. 24, when a government report showed the economy contracted in the 3rd quarter by more than twice as much as economists predicted. This indicates that economic news is beginning to once again have a larger impact on the movement of the major currencies.

While appearing to gain strength recently, the EUR may in fact see a reversal to yesterday's giant upswing. News being released from the Euro-Zone today will likely show higher-than-expected unemployment in Germany and decreased consumer confidence throughout the region. While indicators have had less impact these past weeks due to the financial crisis, they nevertheless still carry weight in the confidence of investors; any negative economic data will have the potential to cause harm to the currency's value.

JPY - JPY's Excessive Volatility Ending as Japan Considers Cutting Interest Rates

As the market's speculation increases that the Bank of Japan (BoJ) will lower its interest rates, the Yen fell for a second day against its currency counterparts, extending its largest ever decline. The first motivation for a potential rate cut is to stem the Yen's appreciation; another motivation is to try to prop up the economy.

Yesterday, Japan's currency dropped 0.5% versus the pound to 156.47 on speculation investors will revive carry trades. In carry trades, investors borrow in currencies with low interest rates and invest in currencies with a higher yield. Japan's target rate of 0.5% is the lowest among major economies. The potential BoJ rate cut led to an unwinding of safe-haven flows to the JPY. Perhaps what has been driving the Yen to its recent strength is not speculation, but the repatriation of Japanese investors and de-leveraging by global investors.

The Group of Seven (G7) issued an unscheduled statement on Oct. 27 saying it was concerned about 'the recent excessive volatility' in the JPY. The Japanese government has also stated that it may intervene in foreign exchange markets by arranging purchases and sales of currencies, if necessary.

Technical News

EUR/USD

The pair continues to make bullish sounds, and is currently testing the 1.3200 level. However, it appears that the 1.3250 level has now become a strong resistance level, and a breach of that level might validate the continuation of the upward move.

GBP/USD

There is a very accurate bullish channel forming on the 4-hour chart as the cable is now floating in the middle of it. The RSI on the daily chart has crossed the 30 line, and the Slow Stochastic is still pointing up, all suggesting that another bullish session is pending. Going long appears to be the right choice today.

USD/JPY

Ever since bottoming at the 91.00 level, the pair has entered a very strong bullish trend and is currently traded around the 98.70 level. And now, a flag formation on the 4-hour chart suggests that the bullish move has more room to go.

USD/CHF

A very sharp bearish movement took place yesterday, as the pair dropped over 300 pips. The current price is floating beneath the Bollinger Bands lower border, indicating that the bearish move is still quite strong. Going short appears to be the right strategy today.

U.K. Chancellor Darling Looks to Revise Fiscal Rules as the Economy Faces a Recession

U.K. chancellor Darling says fiscal policy must evolve. In a speech to be delivered this evening, Darling notes that it "is natural that the conduct of policy should evolve. Just as markets change, so should policy" which appear to hint at the Treasury preparing to revise their fiscal rules to allow for increased borrowing. The Treasury's 40% debt-to-GDP ceiling was already broken after taking on Northern Rock's liabilities and will be push higher still once Brandford & Bingley will be taken into the public books, together with the GBP 37 bln so far estimated to be used for bank recapitalization. Further fiscal stimulus to counteract the growth slowdown is likely require further borrowing still. The fiscal rules, which includes a policy to borrow only to invest and to keep the budget in surplus over the economic cycle, have already lost most of its creditability with the market as the Treasury has been seen as shifting the goalposts by re-classifying some borrowing or extending or shortening the length of the perceived economic cycle. There are market expectations that chancellor Darling will announce revisions or a complete abolition of the rules and that details of the new borrowing plan will be included in next month's pre-budget report.

BoE Reiterates Dovish Outlook, Further Easing to Follow

BoE's Sentance's comments late yesterday adds to fuel expectations of further BoE rate cuts near-term. In a speech late yesterday, Sentance, who voted for a rate hike in the July and August, said that upside inflation risk has diminished since last summer but noted that the Sterling depreciation would squeeze people's living standard as imported goods become more expensive. In regards to a looser monetary policy, Sentance noted that a "cut in Bank Rate, on its own, will not be a magic bullet. No single instrument can work to achieve all goals". We expect the BoE to cut the repo rate by another 50 bp next week.

Daily Forex Fundamentals | Written by DailyFX | Oct 29 08 |

ECB Will Continue to Provide Liquidity as Growth Risks Increase

ECB's Gonzalez-Paramo said bank's role as liquidity provider is only temporary, "until the markets resume functioning normally". He added that the bank is "not meant to substitute to markets and to massively provide liquidity over the longer term". Separately the executive board member said the July hike has been vindicated by facts and gave the ECB room to cut in October. He also said that the economic recovery will be a long process and that downside risks to growth have increased. Nothing really new in the comments that would change the prospect for a rate cut next week.

Meanwhile, Euro-Dollar (EURUSD) consolidated around 1.2700 after it recorded Asian highs of 1.2842. Ahead of the European open an Eastern European name was a good seller around the 1.2800 area, which left the pair on a heavier footing, but demand for EUR-JPY and EUR-CHF on dips is underpinning in to levels underneath 1.2700. The Wall Street surge and subsequent gains in the Nikkei has given a boost to risk appetite. There evidence yesterday of pre-FOMC positioning, with the market optimistic that the Fed will delivery another policy injection to the economy. Also aiding the equity market rally is talk of pension fund related demand, which has loosened up some of the low risk safe haven FX strategies. JPY, CHF and the USD have eased across the board, although volumes and the type of names involved are still though to be low quality, suggesting that the movement we've seen is more speculative in nature. Layered offers are noted in EUR-USD from 1.2760 up to 1.2800, while the downside sees bids at 1.2700, 1.2680 and 1.2650-60.

Daily Forex Fundamentals | Written by DailyFX | Oct 29 08 08:56 GMT |

Waiting On The FOMC

Market Brief

The Usd was weaker in Asian session, as risk sentiment firmed on the back of the massive Wall Street surge. The EurUsd traded up to 1.2839 from 1.2471, while the UsdJpy moved higher on the open to 99.70, before slipping down to 96.09. Commodity currencies found buyers, with the AudUsd trading higher to 0.6532. The UsdNok fell to 6.6860, as crude prices rallied. Carry trades seem to have found a base and with easing risk aversion is regaining ground. The story today is Wall Street buying euphoria, with S&P up 10.78% (despite consumer confidence hitting a record low of 38.0). However, the jubilation failed to carry over into Asia, with a majority of the regional markets trading lower (Nikkei 7.74% as rumors of a BoJ 25bp rate cut circulate ). European futures are point to a higher open, as a VW new exalted status has breathed new life into the continents equity markets. The prospects of central banks easing interest rates, starting with today today's FOMC announcement, has been the core driver to price action as the effects carry over into the equity markets. Should we see another strong day in stocks, watch for the G10 to continue to rally against the Usd & Jpy.

Markets will be keeping their power dry for the Fed decision slated for 18.15gmt today. The market is expecting a 50bp cut, but, more importantly, the Fed has signaled that 1.00% is not necessarily the floor and additional cut are on the table. We expect the accompannying statement to stick a similar note to that release, with the coordinated interbank rate cut. It should highlight the fact that the financial crisis will likely restrain growth and the upside risk to inflation has decreased (as commodity prices have eased and prospects of a global slowdown).

For the Norges Bank policy decision today, we are in line with consensus and expect a 25bp cut. While inflation continued to run above the central banks comfort level, the downside risk to growth has moved to the forefront of concerns. The move should help the stability of the financial market and provide much needed liquidity.

Daily Forex Fundamentals | Written by AC-Markets | Oct 29 08 09:13 GMT |

FOMC Rate Decision, Durable Goods, Equity Dominance

German equity markets were getting sold heavily at the open, in what looks to a move that locks in the 8% trading day (15 days worth of trade in one direction) that came on Tuesday, whilst U.K. and French markets were heavily in the green; no wonder there was extreme volatility at the open of London trade that pulled the currencies all over the charts. The FOMC Rate decision is at 14:15 EDT today and will likely cause some volatility as trade desks get aligned for the expected Fed rate cuts.

There is nothing here until of note until the U.S. Futures market really gets going from around 07:00 EDT. Ahead of Durable Goods and a FOMC rate decision it once again will come down to the equity markets ability to hold in the green, or not. We have seen in overnight trade and at the European open that volatility and reaction to equity movement is still very much the order of the day, but hopefully that will calm down once the Fed's rate decision is out of the way. If so we are very well set for the next three months, times that historically have garnered the best results out of any others in the forex market.

Wall Street was able to make a dash for the finish and end equity trade in the green on Tuesday, and in doing so set the tone for global equity markets to test the resolve of Asian and European traders and their ability to continue the buying of stocks that started overnight on Monday/Tuesday. Asian traders did their part, but the European stock traders let things slip at their end at the beginning of play. The signal from the U.S. was that an equity bounce from dramatically oversold areas dragged the higher yielding currencies up against the dollar, and sent the Japanese yen lower. All of which would be expected under normal conditions, but 'normal' has had its challenges recently.

This is the last week of trade in the hedge fund's year, and apart from book-keeping for the next few weeks there will be no more chances to increase the dramatic holes in their equity balance sheets outside of Wednesday, Thursday and Friday trade. This may end up being nothing other than a fool's rally, care still needs to be taken in where we look, but many answers will come from the Asian and European market's ability to hold in the green.

Daily Forex Fundamentals | Written by TheLFB-Forex.com | Oct 29 08 09:54 GMT |

Federal Reserve May Cut Rate Today To 1% On Signs Of A Weak Economy

Federal Reserve May Cut Rate Today To 1% On Signs Of A Weak Economy

The Federal Reserve may lower its benchmark interest rate to 1 percent today, Tumbling commodities prices and weaker consumer spending are slowing inflation, which officials described as a 'significant concern' at their last scheduled meeting in September. Tomorrow, the Commerce Department will probably report that the economy shrank at a 0.5 percent annual rate in the third quarter. The Fed 'will be very aggressive,' said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. 'Inflation risks are off the table' and 'the issue now is how bad the recession will be.' The EUR/USD is currently trading at $1.2720 as of 8:29am, GMT.

The pound rose against the dollar and euro for a second day on speculation a rally in stocks will bolster demand for the British currency. A two-day gain by the pound versus the U.S. currency would be the first in more than two weeks as the FTSE 100 Index, a U.K. equity benchmark, soared 4.9 percent. Stocks surged yesterday in the U.S. and rose in Asia today. Chancellor of the Exchequer Alistair Darling will pledge extra borrowing today to support the economy as it enters a recession. The GBP/USD is currently trading at $1.6050 as of 8:47am, GMT.

Investors should buy the euro versus the dollar as global risk concerns ease, Citigroup Global Markets Inc. said, citing technical charts traders use to predict price movements. Investors who purchase the euro may gain as much as 4.2 percent as the 15-nation currency rallies from near a 2 1/2-year low, said Tom Fitzpatrick, head of global currency strategy at Citigroup Global Markets.

Economic Calendar

Time (GMT)	E Event	Currency	Period	Previous	Previous	Significance
23:00	Leading Index m/m	AUD		0.0%
21:45	Building Consents m/m	NZD		-7.9%		***
18:15	Fed rate	USD		1.50%	1.25%	***
14:35	Crude Oil Inventories	USD				**
12:30	Core Durable Goods Orders m/m	USD	Sep	-3.3%	-1.5%	****
12:30	Durable Goods Orders m/m	USD	Sep	-4.8%	-1.3%	***
09:30	Net Lending to Individuals m/m	GBP	Sep	1.4B	1.0B	**
09:30	Mortgage Approvals	GBP	Sep	32K	32K	**

Daily Forex Fundamentals | Written by Finotec Group | Oct 29 08 09:34 GMT |

Speculation

Exchange-traded funds (or ETFs) are Open Ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g. SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors aControversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional speculators.

Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona[14]. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[15]

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators allegedly made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia recovered quickly after imposing currency controls directly against IMF advice, this view is open to doubt.nd speculators.

Exchange Traded Fund

Exchange-traded funds (or ETFs) are Open Ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g. SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors and speculators.

Financial instruments--Forward

A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

Financial instruments--Swap

The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.

Financial instruments--Future

Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

Financial instruments--Forward

One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.

Financial instruments--Spot

A spot transaction is a two-day delivery transaction (except in the case of the Canadian dollar, which settles the next day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the spot market. Spot has the largest share by volume in FX transactions among all instruments.

Algorithmic trading in forex

Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.

Factors affecting currency trading

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

Economic factors

These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include: Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

Political conditions

Internal, regional, and international political conditions and events can have a profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

• Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[8]

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[10] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.

Trading characteristics

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism.

The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.

Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.

The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

* EUR/USD: 27 %
* USD/JPY: 13 %
* GBP/USD (also called sterling or cable): 12 %

and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.

Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

Retail forex brokers

There are two types of retail brokers offering the opportunity for speculative trading. Retail forex brokers or Market makers. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail forex brokers, while largely controlled and regulated by the CFTC and NFA might be subject to forex scams. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.

Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

Hedge funds

Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Central banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

The Interbank market

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Market participants

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs

Market liquidity and size

Main foreign exchange market turnover,
1988 - 2007, measured in billions of USD

The foreign exchange market is unique because of

1 its trading volumes,
2 the extreme liquidity of the market,
3 the large number of, and variety of, traders in the market,
4 its geographical dispersion,
5 its long trading hours: 24 hours a day except on weekends (from 5pm EST on Sunday until 4pm EST Friday),
6 the variety of factors that affect exchange rates.
7 the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
8 the use of leverage


As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[1] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this.

This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:

* $1.005 trillion in spot transactions
* $362 billion in outright forwards
* $1.714 trillion in forex swaps
* $129 billion estimated gaps in reporting

Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.

In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.

Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).

Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for retail traders to trade in the foreign exchange market.

Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. RPP

The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of currency, which is a standard "lot".

These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.

What Is Forex?

The foreign exchange (currency or forex or FX) market refers to the market for currencies. Transactions in this market typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The FX market is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global forex and related markets is continously growing and was last reported to be over US$ 4 trillion in April 2007 by the Bank for International Settlement.