Introduction to Foreign Exchange Markets

Being the main force driving the global economic market, currency is no doubt an essential element for a country. However, in order for all the countries with different currencies to trade with one another, a system of exchange rate between their currencies is needed; this system, is formally known as foreign exchange or currency exchange.

In the early days, the system of currency exchange is supported solely by the gold amount held in the vault of a country. However, this system is no longer appropriate now due to inflation and hence, the value of one’s currency nowadays is determined through the market forces alone. In order to determine the value of a currency’s exchange rate, two main types of system is used which is floating currency and pegged currency.

For floating exchange rate, its value is determined by the supply and demand of the global market where the supply and demand is bound by all these factors such as foreign investment, inflation and ratios of import and export. Normally, this system is adopted by most of the advance countries like for example UK, US and Canada. All of these countries have a similarity where their market is well developed and stable in economic terms. These countries choose to practice this system due to the reason where floating exchange rate is proven to be much more efficient compared to the pegged exchange rate. The reason behind this is because for floating exchange rate, the market itself will re-adjust the exchange rate real-time in order to portray the actual inflation and other economic forces. However, every system has its own flaw and so does the floating exchange rate system. For instance, if a country suffers from economic instability due to various reasons such as political issues, a floating exchange rate system will certainly discourage investment due to the high risk of suffering from inflationary disaster or sudden slump in exchange rate.

Another form of exchange rate is known as pegged exchange rate. This is a system where the value of the exchange rate is fixed by the government of a country and not the supply and demand of the market. This system is called pegged exchange rate because the value of a country’s currency is fixed to another country’s currency. As a result, the value of the pegged currency will not fluctuate unlike the floating currency. The working principle behind this system is slightly complicated where the government of a country will fixed the exchange rate of their currency and when there is a demand for a certain currency resulting a rise in the exchange rate, the government will have to release enough of that currency into the market in order to meet that demand. However, there is a fatal flaw in this system where if the pegged exchange rate is not controlled properly, panics may arise within the country and as a result of that, people will be rushing to exchange their money into a more stable currency. When that happens, the sudden overflow of that country’s currency into the market will decrease the value of their exchange rate and in the end, their currency will be worthless. Due to this reason, only those under-developed or developing countries will practice this method as a form to control the inflation rate.

However, the truth is, most of the countries do not fully practice the floating exchange rate or the pegged exchange rate method in reality. Instead, they use a hybrid system known as floating peg. Floating peg is the combination of the two main systems where one country will normally fixed their exchange rate to the US Dollars and after that, they will constantly review their peg rate in order to stay in line with the actual market value.

The Foreign exchange market, or commonly known as FOREX, is the largest and most prolific financial market because each day, more than 1 trillion worth of currency exchange takes place between investors, speculators and countries. From this, we can deduce that the actual mechanism behind the world of foreign exchange is far more complicated than what we may already know, and that, the information mentioned earlier is just the tip of an iceberg.

Gold Rates

Gold Rates in other Major Currencies

Currency              Symbol   10Gm    1Tola     1Ounce
Australian Dollar      AUD          407           474            1,265
Canadian Dollar       CAD          397           462            1,233
Euro                            EUR           251          292          780
Japanese Yen          JPY         33,289       38,787        103,542
Pakistan Rupee        PKR         31,266       36,430         97,250
U.A.E Dirham           AED         1,376       1,603            4,280
UK Pound Sterling     GBP          226          263               703

Guide to Forex

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HOW THE ROAD WAS PAVED

Today’s forex market was formed in the early 1970’s. The first major  step in the formation of the market was the Bretton Woods Accord, which was established after World War II to restore the world’s  economic state. The Bretton Woods Accord decided that all major  currencies would be pegged to the U.S. dollar, which was pegged  to gold at a price of $35 per ounce. Under these standards, the  major global currencies pegged to the U.S. dollar were only able  to fluctuate by one percent.  The European nations sought to move away from their dependency of the dollar in the 1970’s, thus forming the Smithsonian Agreement  and the European Joint Float. Each agreement was similar to the  Bretton Woods Accord, but allowed a greater range of fluctuation  in the currency values. However, both agreements failed, paving  the way for the free-floating systems. There were no longer pegs  on currencies, and therefore currencies were able to fluctuate freely.   Traders utilize these fluctuations on the forex market. By studying price changes and current events, a forex trader can buy or sell one currency against another in hopes of making a profit off of the price fluctuations .  TOOLS Our Future Lessons  An Introduction to Forex

THE BASIC MECHANICS BEHIND A TRADE

Before you can steer your forex career in a profitable direction,  you need to know some market basics.   Trading Hours  The Forex market is a global entity.  Market hours overlap one another,  ensuring that there’s always an open  market. Traders can make trades 24  hours a day, 5 days a week. The  market closes on Fridays at  21:00 GMT and reopens on  Sundays at 21:00 GMT. TOOLS Trading Hours  Trading Pairs A trading pair consists of a base  currency and a quote currency.  The first currency listed in the  pair is the base currency,  while the second currency is the  quote currency. Traders buy or  sell the base currency using the  quote currency.Let’s take a look  at this pair:  EUR/USD  In the trading pair above, the Euro is the base currency and the  United States Dollar is the quote currency. If you are trading with  the EUR/USD, you’d be purchasing or selling the Euro using the  United States Dollar. TOOLS Trading Pairs  Leverage Leverage is a big part of Forex  trading. Leverage is a loan  given to a trader by a broker  to intensify that trader’s results.  Calculating leverage is simple.  All you have to do is multiply  the leverage by how much you  wish to trade. A leverage of  100:1 means that the broker will   match every 1 dollar you  trade with 100 dollars.  A leverage of 20:1 means  that every 1 dollar you trade will be matched by 20 dollars,  etc. For example,  if you sign up with Forex Club’s minimal balance of $10  and trade with a leverage of 100:1, that means that you can  trade ($100x10=) $1,000. TOOLS Leverage

HOW TO GET THERE SAFELY

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Forex: USD/JPY rises above 89.30

FXstreet.com (Córdoba) – The Dollar is rising against the Yen and recently broke above 89.30 and rose to 89.43, posting a fresh intra-day high. In case of further appreciation, next resistance levels will be 89.55 (Nov 17 high) and above here, 89.75 (Nov 16 high). USD/JPY trades at 89.37/40, 0.15% above today’s opening price, near the highs suggesting that it could continue rising during the American session. 

The FastBrokers Research Team affirms: “Investors shouldn’t forget that Japan’s Prelim GDP topped expectations by 5 basis points to kick off the week. Therefore, one may expect investors to send the USD/JPY lower due to a more favorable outlook for the Yen as compared to the Dollar. However, the USD/JPY is continuing to hold strong above our 1st tier uptrend line since the currency pair is drifting closer to a key retracement towards October lows. Regardless of the USD/JPY’s present resilience, there is still a long-term downtrend at play and our technical cushions are wearing thin.”

Forex: EUR/USD rises above 1.4980 and hits fresh intra-day highs

FXstreet.com (Córdoba) – The Euro rose to a fresh high at 1.4987 and approaches to 1.5000. EUR/USD continues to rally after rebounding yesterday at 1.4810. Currently the pair trades at 1.4975/80, 0.705 above today’s opening price. 
To the upside, immediate resistance lies at 1.5000 (Nov 17 high) and above at 1.5020 (Nov 16 high). The pair needs to break above 1.5000 in the next hours otherwise Dollar could gain momentum.

The FastBrokers Research Team affirms: “The EUR/USD still faces multiple downtrend lines along with the highly psychological 1.50 level and previous November highs. However, and a breach beyond our 3rd tire downtrend line could result in a retest of November and October highs with the possibility of more accelerated immediate-term gains. Unfortunately for bulls, the EUR/USD was negated by our 3rd tier downtrend line and 1.50 on Monday, telling us the 1.50 zone continues to have a psychological impact on the currency pair.”