Forex Market Participants

In the last years, the Foreign Exchange Market has expanded from one where banks would execute transactions between themselves to one in which many other kinds of financial institutions like forex brokers and market-makers participate including non-financial corporations, investment firms, pension funds and hedge funds.

Its' focus has broadened from servicing importers and exporters to handling the vast amounts of overseas investment and other capital flows that currently take place.

Lately foreign exchange day trading has become increasingly popular and various firms offer trading facilities to the small investor. Foreign exchange is an 'over the counter' (OTC) market, that means that there is no central exchange and clearing house where orders are matched.

Geographic trading 'centers' exist around the world however and are: (in order of importance) London, New York, Tokyo, Singapore, Frankfurt, Geneva & Zurich, Paris and Hong Kong.

Essentially foreign exchange deals are made between participants on the basis of trust and reputation to deliver on an agreement. In the case of banks trading with one another, they do so solely on that basis.

In the retail market, customers demand a written legally accepted contract between themselves and their broker in exchange of a deposit of funds on which basis the customer may trade

Some market participants may be involved in the 'goods' market, conducting international transactions for the purchase or sale of merchandise.

Some may be engaged in 'direct investment' in plant and equipment, or may be in the 'money market' trading short-term debt instruments internationally. The various investors, hedgers, and speculators may be focused on any time period, from a few minutes to several years.

But, whether official or private, and whether their motive be investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the rate, they are all part of the aggregate demand for and supply of the currencies involved, and they all play a role in determining the exchange rate at that moment.

Forex Market Participants
By Nicholas H. Bang
support@ac-markets.com

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The Top Eight Themes for Currency Markets in 2008

Rosalind Mathieson (Managing Editor-Asia Markets) Written a Article and Published in "Gulf Times",its a Qatar Based Top-Selling English Daily News Paper. This article given a good overlook of 2008 Trading. So , I am Posting in My Forex Knowledge Base Blog
Published: Monday, 24 December, 2007, 03:34 AM Doha Time
By Rosalind Mathieson


SINGAPORE: One of the best things about 2008 could be that it isn’t 2007. It has been equally an exciting, scary and tiring second half of the year. And that is just at Dow Jones, where we have a new owner. Jokes aside, there will be more than one currency trader keen to see the back of this year. Volatility may have provided the chance for some hardy investors to make good gains, but no doubt at the expense of a few sleepless nights.

Markets are likely to stay unpredictable for some time, so it’s a little hard to say with confidence where we’ll be at this time next year. Still, this column has made some attempt to look into the crystal ball, coming up with our “top eight” themes for currency markets in 2008. Some of these themes will continue to play out from 2007, but there also some new (or renewed) ones.

Firstly, to the US dollar: It has been a good year to take a vacation to the states. The greenback started the year around 121 against the Japanese yen. It had a pretty good first half, rising to around ¥124 in June. But the wheels fell off in August, and it dropped to near the ¥109 mark at one point. Ouch.

Things may start to look better though for the buck in 2008. The cheaper currency has helped US exports, underpinning the economy. Continued gains in U.S. Treasurys shows central banks around the world are willing to keep funding America’s twin deficits.

The Federal Reserve may have a few more interest rate cuts up its sleeve, but it is unlikely to take drastic action unless the US economy slows much faster than it is now.

Theme number two is the carry trade: which should find renewed interest in 2008. To be sure, such trades don’t like volatile markets, but central banks in Australia and New Zealand and the like don’t look set to start slicing rates aggressively, and Japan is not in a position to be hiking anytime soon. Investors should still be able to make a profit from selling lower-yielding currencies like the yen and parking money in markets that pay higher rates.

Theme number three is currency pegs: The weakness in the dollar, and the rate cuts by the Fed, have spurred much chatter about the countries in Asia and the Middle East that peg their currency to the greenback.

That has especially been the case given nations in the Middle East are battling inflation and are less able to cut interest rates to keep their currency pegs in alignment. So far, though, the Saudis have shown little stomach to unhitch the riyal and without their lead, other Gulf nations are unlikely to race to depeg. The possibility of a dollar recovery in 2008 could also keep them at bay.

The “R” word may continue to loom over currency markets in the early part of 2008, but as a strong batch of strong data last week on retail sales and consumer and producer prices showed, the US economy isn’t for now tipping toward recession. Consumer sentiment is holding up despite prolonged weakness in the housing market and as long as that remains the case, the recession talk will remain just that.

Theme four therefore: The US economy is slowing but doing surprisingly OK. A soft landing in the US would be good for Asia, as currency markets realise the decoupling argument is a little tenuous. Asia and Europe wouldn’t escape the fallout from a major US slowdown. A “recoupling” of the “decoupling” theory may help underpin Asian currencies as people embrace the soft landing outlook for the US and embark on growth trades.

Theme five is the familiar bogeyman under the bed: Inflation. High food and energy prices will remain a risk in 2008. Food scarcity will increasingly become an issue, potentially a social one as poorer people are forced to pay more for cooking oil, rice and other essentials.

Central banks in Asia will have to remain alert to the threat of inflation. That means tolerating some appreciation in their currencies, even if it compromises some of the export competitiveness. It’ll be a fine line to walk.

Theme six will be the noise surrounding Presidential elections in the US: Currency traders can expect a pickup in the rhetoric on China with the Democrats likely to play the “yuan card” heavily. US Treasury Secretary Henry Paulson has been taking a measured line on China but he’ll come under more pressure to produce concrete results via even faster gains in the yuan than we’ve seen in recent months. “China bashing” on the trade front will also be inevitable.

The main thing for markets to remember, though, is that punitive measures are unlikely and Beijing has shown little interest in acting just because the rest of the world says it should.

China itself is theme number seven: Much will depend on how much it acts to slow the economy and curb the stock market, with Beijing recently flagging tighter policy ahead. Part of that tighter policy will probably include further gains in the yuan – as officials realise this is in their own interest. But don’t look for China to provide markets with another “big bang” revaluation in its currency or a shift towards a greater currency basket. Change will remain incremental.

Rounding out the top eight for currency markets in 2008 will be sovereign-wealth funds: The balance of power in markets will increasingly shift their way, so keep an eye on developments in the sector.

SWFs are already starting to nose their way into equity investments and they no doubt will be looking to deploy more resources next year into other asset classes, including higher-yielding debt and currencies.

One of the biggest issues for markets will be working out where these funds are parking their money. It’s not as though they need to make it publicly known, unless they are buying a public company.

Most central banks however have made it clear they don’t intend to diversify existing reserves away from the US dollar. Rather, new reserves may be spread across different currencies, including the euro.

It wouldn’t be in their own interest to bail out of the dollar wholesale. They’d only be hurting themselves in terms of the prices they’d get. Taken together, what do these eight themes mean?

They suggest market noise will blow into the early part of the year, but that a semblance of calm may return in the second half of 2008. The US economic outlook is OK, though not super, and Asia should continue to grow. Asian currencies are set to keep gaining, in part on demand for carry trades against the yen, while the US dollar could find itself on a firmer footing against the majors.


Caveats to this view: The US economy tanks, China miscalculates and over-tightens, or spurs a panicked bubble burst in the stock market, or oil goes over $100 and stays there. And, as former US defence secretary Donald Rumsfeld so famously said, there are known knowns, known unknowns, but also unknown unknowns. Still, the new year will give markets a chance for a fresh start. – Dow Jones Newswires

(Rosalind Mathieson is the Managing Editor for Dow Jones Markets News in Asia. She has 13 years of experience as a political and financial reporter and editor, having worked previously at Australian Associated Press in Sydney and Canberra.)

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