FOREX Trading on Fire: The Factors Behind This Market’s Massive Global Surge
by Martin Denholm, Senior Editor
Friday, September 3, 2010
So much for that global financial crisis.
The currency market has shrugged off the world’s woes over the past three years and blasted into the stratosphere.
New figures from the Bank for International Settlements (BIS) show that currency trading has jumped by 20% over the past three years to a massive $4 trillion every day.
That’s the equivalent of trading Germany’s annual GDP each day and moving the entire world’s economic output around once every two weeks, according to BBC business writer, Robert Peston. Staggering.
And it’s good news for London’s huge financial centre, which took a major wallop when the crisis hit. Trading activity in the world’s top foreign currency exchange centre leapt by 25% over the three-year period – double the amount in the United States. London is home to 37% of all global currency-trading turnover, twice as much as second-placed New York.
So what are the reasons behind the big surge? Glad you asked…
Three Reasons Why the FOREX Fire is Blazing
Quoted in Reuters, Alan Bozian, CEO of CLS Bank (a FOREX settlement bank) states: “FX remains a very fertile environment and the number of participants and the number of types of participants has grown.”
And that’s due to three main factors:
- Emerging Market Growth: The growth of emerging market nations on the global stage – both as bigger currency players themselves and recipients of inflows to their own currencies. Obvious examples include China and Brazil, but in the developed world, Australia has also proved attractive, as it weathered the global crisis better than most and it was the first to raise its interest rates.
- Greater Education and Ease of Trading: The greater education, ease and speed of currency trading. As the BIS figures show, currency trading has grown in popularity and executing trades has become faster and easier with the shift to more electronic trading. For example, BIS said there was a 48% surge in the number of spot trades, largely due to high-tech trading platforms that can process thousands of trades in seconds. And that growth in the spot market accounted for 97% of the overall jump in FOREX activity.
- More Players: There are now a vast number of other institutions now trading currencies. Once the playground for just a few traditional players, you’ve now got hedge funds, pension funds and insurance funds all in the mix with central banks and other banks. In fact, the BIS said hedge fund and central bank currency transactions topped traditional interbank traders for the first time, arguably because of a rise in foreign currency holdings during the financial crisis.
Pair of Aces
In terms of the world’s most actively traded currency… sorry, no prizes for guessing that it’s the good ol’ greenback. The U.S. dollar accounts for 85% of all trades. And although that’s down from its 90% peak in 2001, it’s still head-and-shoulders above the rest.
And despite their assorted problems, the dollar and euro are still the most popular currency trading pair, grabbing a 28% share of the market. The dollar-yen trade lags in a distant second place, with just 14% of the market. The dollar-pound pair also slipped to a 9% market share.
Elsewhere…
Currencies Rising: the Australian and Canadian dollars, which arguably reflects the countries’ strength in natural resources and more responsible federal budget management. And among emerging markets, the South Korean won and Turkish lira saw a big rise in activity.
Currencies Falling: the British pound, with turnover dropping from 22% to 18%, plus the Swiss franc.
Best regards,
Martin Denholm
Six Currencies… One CD… And an Excellent Way to Diversify
If you’re looking for a quick and easy way to diversify into the global FOREX market, our friends at EverBank® have devised the Ultra Resource Basket CD.
All of the six equally weighted currencies in this CD come from countries with the potential to benefit more than others as global economic growth resumes – Canada, Australia, Hong Kong, Norway, Singapore and New Zealand.
How can you potentially benefit? Returns are based on a fixed-interest rate, plus changes in the value of the currencies versus the U.S. dollar. It’s also FDIC insured against bank insolvency.
To learn more about EverBank’s Ultra Resource Basket CD and invest in it, click this link.
Related Investment U Articles:
- Bank of Japan Steps In as Yen Hits 15-Year High Against U.S. Dollar
- How to Avoid Taking it on the Chin… Again
- The Dollar – Up, Up and Away
- The Fed Versus Emerging Markets
- The Redback vs. The Greenback: A Global Financial Revolution Begins…
Comments
**By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy. |
 |
