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Tips for Understanding the Currency Trading Markets

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Investments come in many forms. The traditional options for investors are equities (Exchange Traded Funds (ETFs) and individual stocks), commodities (gold, silver, crude oil, platinum, coal), indices (FTSE 100 index, CAC40, DAX 30, NASDAQ etc.) and to a lesser degree currencies. Many folks create investment portfolios that are heavily weighted towards stocks, mutual funds and ETFs. This is the conventional route for investments. Domestic stocks and foreign stocks dominate portfolios for retirement purposes and for personal trading needs.

If you have a propensity for risk, you would opt for an aggressive growth selection, and if you were risk-averse, you would opt for a conservative growth selection. Stocks are considered risky propositions, although there is tremendous latitude within that ambit. The safe stocks are the heavy hitters on the Dow 30 the blue-chip stocks. However, geopolitical uncertainty, volatility and macroeconomic variables can dramatically impact stock prices.

Oil and Equities: An Uncorrelated Relationship?

Most people will have the bulk of their investments held in equities, with companies like Google, Facebook, General Electric, Amazon, Comcast, General Motors, Ford, Target, Walmart, McDonalds etc. But commodities are extremely important too. Crude oil prices and equities markets shared a unique relationship until recently. When oil prices rose, equities markets followed suit, and vice versa. This close correlation was broken midway through 2016 as the significance of crude oil diminished on US equities markets.

There is a remarkable explanation for the cessation of this relationship: As oil prices tumbled from over $100 per barrel to the $30 $40 per barrel range, the market capitalization of energy companies on Wall Street (Exxon Mobil, British Petroleum, etc.) was eroded dramatically. This means that the impact of falling oil prices on the overall stock market has been reduced. As such, investors neednt concern themselves too much with the oil price correlation with equity price movements.

There are many other investment avenues available to traders in the form of currency markets. Since currencies dominate all forms of international trade, it makes sense that this is the worlds biggest market. Estimates peg the value of currency trading at over $5 trillion per day. That dwarfs the value of all equities trading around the world combined. Most currency trading (approximately 50%) takes place in the United Kingdom, but the US, Europe, Japan, and China are quickly accounting for a greater share.

When you are trading currencies, its important to understand the drivers of cross currency exchange rates. Naturally, the performance of the US economy, the UK economy or the European economy are paramount when trading currencies of those countries. Much the same is true of all other countries. In this vein, its important to look out for macroeconomic variables such as gross domestic product, employment data, interest rates, inflation rates, consumer and producer figures, and soft economic data releases which can also impact speculative sentiment.

Economic Data Releases Drive Markets

Soft economic data is less important than hard economic data which typically drives the actions of central banks and governments with monetary and fiscal policy respectively. Its important to understand that the strength of the USD has a profound impact on the performance of companies listed on Wall Street. When the USD is strong relative to other currencies, it means that US exports will suffer, but imports will be more affordable. If companies are primarily in the business of exporting their products and services overseas, their profitability will decline with a strong USD. By contrast, companies that import from abroad and sell domestically will benefit from a strong USD. Companies like Walmart, Target Corporation, Costco and Macys may benefit from a stronger greenback.

Expanding Investments into FX Options

The Bank of England is currently dovish, and supports monetary easing with central bank purchases of bonds and assets, and low interest rates. By expanding your investments into currencies, you can certainly boost the value of your financial portfolio, provided you understand the mechanisms that drive currency markets. For example, in the UK, a strong GBP will result in a greatly diminished FTSE 100 index, while a weak GBP will cause the FTSE 100 index to rally. These interrelationships are important since they will determine your success in all forms of trading and investments.

One of the worlds leading online trading portals, Stern Options offers reliable trade executions on a wide range of currencies, commodities, indices, and stocks. According to Humphrey Reginald Burns, a trading expert: As a currency trader, you are always working with 2 currencies at any one time. In a typical pair, there is a base currency and a quote currency. A pair such as the GBP/USD pair is sold if the USD is shorted, and the pair is bought if the GBP is purchased. Currency traders often have to assess the implications of central bank policy in both countries to determine which way a pair is likely to move. Presently, the Federal Reserve Bank is trending towards monetary tightening, meaning that the USD should appreciate relative to other currencies.

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