Forex and financial markets

The foreign exchange market or Forex as it is known in English is the generic term is called the set of global institutions that exist to exchange or currency trading. It is also called the FX market. This is a market, "over the counter," meaning that there is no centralized, or common market institutions that are responsible for ensuring compliance with orders. FX traders and market makers are connected to each other via phone, fax and computers, thus creating the market.

During recent years, currency trading has become very popular among medium and small investors. The growth in volume traded in recent years has been 57% on average. In 2004 the daily volume traded reached $ 1.9 trillion USD, which is twenty times the value of which is traded daily on the New York Stock Exchange and NASDAQ. One explanation of the increase in turnover is in the emergence of online transactions, which have allowed the entry of new players into the market, most small investors.

Another factor behind the rise of the Forex market is the relationship with the market for bonds and equities. This has led many investors to pay attention to this market has to make more informed business decisions. These factors are:

The dealers or traders involved the stock market, especially those who trade with European companies that export to United States, monitor exchange rates to predict future earnings and profitability of business. When the rate EUR / USD (U.S. dollars to pay for one euro) raises the earnings of European companies exporting declined because their products are more expensive for U.S. importers. For example, in 2003 the Dutch State Mines chemical company warned that a 1% increase in the EUR / USD would reduce its profits between 7 to 11 million euros.

Foreign investors, especially Americans, should be attentive to the relationship between the USD / JPY (Japanese Yen JPY mean) and the Nikkei stock index. Recently, the Japanese economy out of a period of stagflation (economic stagnation with inflation) and many U.S. institutional investors had underestimated the market in their global investment portfolios. When the economy began growing again, these funds rushed to rebuild their portfolios and Japanese began to buy shares in order to exploit the economic recovery of this country. Arbitrage funds or hedge funds began to borrow in dollars to finance these investments; however the increase in interest rates in United States has increased the cost of these resources and limited the Japanese bull market. The U.S. Federal Reserve, or Fed, has increased its interest rates to finance the growing current account deficit. This has made investments in dollars are more attractive. Therefore, monetary policy has an effect on U.S. dollar and indirectly on the Japanese stock market.

George Soros. In the world of bonds, some of the most famous in the history of the forex market is George Soros. He is known as the man who broke the Bank of England. In 1990, the United Kingdom decided to join the Exchange Rate Mechanism (ERM) or exchange rate mechanism of the European Monetary System in order to participate in a stable European economy and low inflation rates generated by the monetary policy of the German central bank or Bundesbank. This alliance linking the pound with the deutsche mark, which means that, the United Kingdom was subject to the monetary policy set by the Bundesbank. In the early nineties, Germany aggressively increased its interest rates to avoid an outbreak of inflation resulting from German reunification. However, national pride and commitment to fixed exchange rates within the ERM prevented the United Kingdom devalued the pound sterling. On Wednesday, September 16, 1992, also known as Black Wednesday, George Soros leverage their entire fund (USD $ 1 billion) and sold U.S. $ 10 billion pounds by betting against the existence of the ERM. This essentially "broke" the Bank of England and forced the devaluation of its currency. In just 24 hours, the British pound fell 5% or 5000 pips. The Bank of England promised to increase its interest rates to attract speculators to buy the pound sterling and stop his fall. As a result, bond markets experienced extreme volatility, with the one-month LIBOR rate increased one percent and then back in the same order of magnitude in less than a day. If investors in bonds had been aware of what is happening in forex market, would not have been amazed at what was happening in their market.

The revaluation of the Yuan and bonds

Over the past years have speculated on the revaluation of the Yuan (Chinese currency) and in effect since 2005 China has allowed small revaluation of its currency in order to reduce the trade imbalance with the other world powers. China has kept its currency artificially within a narrow trading range in order to ensure the competitiveness of their business and maintain its economic growth. This has led to rejection by companies and governments around the world. It is estimated that the Chinese exchange rate system has kept the Yuan below its real value between 15 to 40%. To achieve this system, the government has sold Chinese Yuan and buying dollars whenever the exchange rate is above the upper band. With the dollars that bought the government purchase U.S. Treasury bonds. Thus the Chinese government has become the largest holder of U.S. bonds and the demand for Treasury bonds has kept interest rates low. A revaluation of the Yuan brings problems for the Treasury bond market, and that means lower demand from its main participant. This would mean higher interest rates and lower prices. Therefore, investors in the bond market should follow carefully what happens in the forex market, in this case with the Yuan.