The Economic Environment - An Australian Perspective

An understanding of monetary flows in the economy, and specifically through the financial system, is fundamental to an understanding of how trading operates, and the influences on the price of money (interest rates).

Similarly, an understanding of monetary flows between economies is fundamental nto an understanding of how trading operates, and influences, the price of an Australian dollar expressed in terms of another currency (exchange rates).

Interest Rate Determinates - The flows of funds in the economy
The flow of funds is the process that facilitates the exchange of goods and services for money. A direct flow of funds is the transfer of funds directly from a saver (ie lender or investor) to a borrower, or a buyer to a seller, while an indirect flow of funds includes one (or several) intermediaries being interposed between these parties.

The flow of funds can essentially be viewed as involving the interplay between five broad operational sectors of the economy - one of which (overseas) is external. These sectors are:

• Household
• Business
• Finance
• Government
• Overseas

Flows are of two different typesL those arising from the permanent transfer of funds from one party to another; and non-permanent transfers arising from one party lending to, or investing with, another.

Permanent flows include:

• Taxation payments and refunds
• Salaries and wages
• Interest
• Dividends
• Purchases and sales

Non-permanent flows include:

• Loans
• Deposits
• Investments

Flows of funds in the economy are complex, but a number of main characteristics can be identified:

• The general public and housholders are net investors
• Government and semi-government are net borrowers
• The corporate sector is a net borrower
• Financial intermediaries are net neutral, with funds borrowed and lent being approximately equal
• The overseas sector is a net lender to the Australian economy.

The flow of funds within, and between each sector of the economy, results in a situation where some participants will have more funds than they need to meet their obligations (ie a surplus) or insufficient funds to meet their obligations (ie a deficit), or, rarely, a balance between their available funds and their obligations.

The financial system facilitates a credit allocation function (the process of distributing funds from lenders to borrower) to allocate funds from those who are in surplus to those who are in deficit. The interest rate at which this process is optimised is where the demand from funds from those in deficit, equals the supply of funds from those in surplus. Factors taken into consideration in determining this rate include the underlying rate of inflation, risk, liquidity and the transaction term.

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Economic Factors Affecting Interest Rates

Interest rate, being the price of money, are dependent on the supply of, and demand for, funds, which in turn is determined by:

• The overall level of liquidity in the market, which is controlled by the RBA through its open market operations.
• The level of fund deficits in particular sectors of the economy, which is largely driven by permanent flows, particularly expenditure.
• The level of fund surplus in particular sectors of the economy, and the willingness of those in surplus to lend to other sectors of the economy, which will be influenced to a large degree by the perceived risk of funds due not being repaid, ie credit risk.
• The period for which the funds are required, and the flexibility of the lenders in investing for different periods.

Four parts make up the term structure of interest rates:

• The risk-free rate which is based on the overall supply of, and demand for overnight funds.
• A credit risk premium which is added to the risk-free rate, being compensation to the lender for taking the risk that the borrower does meet all commitments as they fall due (the longer the term, the higher this premium).
• The premium arising from the period for which funds are committed, (again, the longer the term, the higher the premium), to compensate for greater uncertainty.
• An adjustment to reflect expectations as to likely future movements in the level of rates.

Policy Factors Affecting Interest Rates

Monetary Policy

Overnight Interest Rate.

The RBA's monetary policy decisions involve setting the target interest rate on overnight loans in the 'interbank' or professional currency market. Whilst this mainly impacts the short end of the yield curve (ie out to one year), it does impact all interest in the economy to varying degrees.

Inflation.

The inflation rate measures the change in prices over a given period. The most common measure is the quarterly headline Consumer Price Index (CPI) which measures changes in the price of a 'basket' of goods and services.

The level of inflation affects interest rates in two ways:

Firstly, whilst not the only driver, the RBA has low inflation as its key monetary policy target, as high inflation has adverse social and economic effects. These include declining living standards for fixed income earners, potential falls in the value of the Australian dollar and lack of confidence in the financial system - especially in the currency as a stable medium of exchange. Such changes often cause social hardship and unrest. An inflation rate continually above their current target of 2-3% would lead to an increase in interest rates by the RBA to stem demand.

Secondly, inflation erodes wealth. As inflation increases, purchasing power decreases. To mitigate this, a higher level of interest income is demanded by investors to maintain real rates (the nominal rate adjusted for inflation), pushing up interest rates generally.

Inflationary pressures can result from:

• A increase in manufacturing costs, eg through an increase in the cost of imports caused by a fall in the value of the AUD. It may also come from an increase in salary and wages. This is known as cost-push inflation.
• An increase in demand for goods and services, stemming from excessive cash in the economy. This is demand-pull inflation.
• Expectations of future inflation. If a company believes its costs will increase, it will tend to raise the price of its goods in anticipation.

Fiscal Policy

The government's fiscal policy, which centres on the annual budget, can be expansionary, contractionary or neutral. An expansionary policy is one where more money is put into, or left in, the economy. This is achieved by reducing taxation and/or increasing government spending, often resulting in a budget deficit. It will tend to stimulate the economy and may ultimately lead to an expectation of higher inflation and the need to increase interest rates.

A contractionary policy is the opposite. Fiscal tightening creates a curb on economic growth and hence on inflationary pressures with consequent falls in interest rates. Australia has had a tightening fiscal regime since the early 1990s and this is expected to continue for the foreseeable future.

A neutral fiscal policy is one where the budget is balanced.

Compared with monetary policy, fiscal policy tends to have little effect on the short end of the yield curve with its main impact being on longer maturities, although the effect is neither large nor quick. However, fiscal policy which is considered too extreme, eg. an excessive surplus, may engender movements. In this case, increases in short-term rates as market participants anticipate that changes to monetary policy settings will be required to counter the inflationary pressures, emanating from the perceived fiscal excess.

Key Economic Indicators

To forecast future changes in the flow of funds and the level of interest rates, it is necessary to monitor those economic indicators which influence rates.

Several main economic indicators can be identified:

Learn about the UK Economic Indicators

Learn about the US Economic Indicators

Learn about the Swiss Economic Indicators

Learn about the German and Euro Economic Indicators

Inflation - direct

• Consumer Price Index (CPI), issued quarterly

This means changes in the price of a basket of goods and services which accounts for a high proportion of expenditure by metropolitan households.

• Inflation expectations

Surveys are published which attempt to measure anticipated inflation, such as those conducted by the Melbourne Institute of Applied Economic and Social Research, the Confederation of Australian Industry and Westpac.

Inflation - indirect

• Employment (monthly)

This provides an indication of likely pressure on wages and also is a general guide to overall economic activity and expectations.

• Building approvals (monthly)

Strong demand for new housing, evidenced by rising building approvals, can lead to increases in demand for white goods, furniture and the like. This flow-on spend adds to the inflationary pressure of the new home building itself

• Wage Cost Index (WCI) (quarterly)

This measures changes over time in wage and salary costs for employee jobs. The methodology used excludes the impact of hours worked, quality of output and changes in the composition of the labour market. It has largely replaced the traditional measure of Average Weekly Ordinary Time Earnings (AWOTE) as the forewarning of emerging wage push pressures. High WCI increases can indicate future inflationary pressures, as the higher wages are factored into both cost-push inflation through higher manufacturing costs, and demand-pull pressure from increased spending.

• Retail trade (monthly)

The level of retail trade gives a direct indication of retail demand and may indicate demand-pull inflationary pressures.

• Gross Domestic Product (GDP) (Quarterly)

GDP is the main indicator of the strength (growth) of the economy. High levels of GDP indicate strong growth, which in turn may lead to increased inflationary pressure, as growth is translated into demand through salaries and wages.

• Balance of payments (quarterly)

This provides a measure of the value of transactions between residents of Australia, and non-residents. It is divided into a current account (goods, services, income and current transfers), a capital account (acquisition/disposal of non-produced, non-financial assets) and a financial account (foreign financial assets and liabilities). The immediate impact of an unexpectedly large current account deficit tends to be on the exchange rate, although a continuing deficit problem will filter through to interest rates.

CHECK OUT more about the Australian Economic Indicators!

The Global Economy

Australia plays a relatively minor role in total international trade and is therefore largely at the mercy of global swings and economic cycles. Slowdowns or rapid growth in sectors of the world economy (particularly in Australia's major trading partners), feed through, with varying lags, to domestic economic conditions.

Maintaining independent monetary policy is thus often difficult, and adjustments to cash rates by bodies such as the US Federal Reserve, can rapidly change expectations in Australia.

Exchange Rate Determinates

The Flow of Funds Between Economies

The exchange rate is a price which, like all parties when flexible, serves to keep a market in equalibrium - in this case, it is the equalibrium in our balance of payments with the rest of the world.

Foreign exchange transactions occur for different reasons. They arise from international trade, capital flows, intermediation and specualtion.

International trade is the most fundamental reason for foreign exchange transactions. Importers buy foreign currencies to pay for imported goods. Exporters sell foreign currencies received from the sale of goods to foreigners.

Companies in Australia import products from a manufacturing country. Typically, an overseas manufacturing company would have no desire to hold AUD, so it requests payment in either their local currency or a readibly convertable currency such as USD. Much of the worlds trade is priced and settled in USD.

Capital transactions include investments by a company or individual in an asset denominated in another currency; and borrowing of funds by a government, company, or individual in a foreign currency.

Banks act as intermediaries between customers that buy and sell foreign currencies. Frequently, a bank that buys foreign currency from a customer or from another bank will lay off its risk by selling the currency to another bank. Typically, interbank turnover is four to five times greater than customer turnover.

Foreign exchange speculation refers to buying a currency against another currency, with a view to reversing the deal and gaining a profit. Positions can be taken for very short periods of for long periods, although long-term positions in the speculative market are normally closed out before maturity.

Speculative positions may also be taken against interest rate movements. These can be done through either the forward market or the Eurocurrency market. There are many forms of speculation involving foreign exchange and interest rates, whether they are against eachother or other commodities and they are limited only by the perceived risk/return expectations.

The exchange rate is therefore sensitive to all of the influences that typically affect trade and investment decisions, especially expectations about future asset prices - including expectations about the exchange rate itself. These expectations can dominate in the short-term and can change quickly in response to such things as changing news about the economy, changing prospects for the current account, changing perceptions about policy, or even to political events. The exchange rate can be driven by market psychology to levels that are difficult to explain in terms of underlying economic conditions.

Type of Exchange Rate Regime

The term foreign exchange means a transaction that exchanges one country's currency for that of another. A foreign exchange rate is the price of one currency expressed in terms of another. The rate is quoted as a ratio of the value of one currency to another ie AUD/USD 0.91000 means AUD 1 equals 0.9100 USD.

A fixed exchange rate system means that exchange rates are kept constant. A floating exchange rate system means that exchange rates vary with supply and demand. The Australian dollar was floated and exchange controls were lifted on 11 December 1983.

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Terms of Trade

The real value of the Australian dollar is influenced over the long term by the terms of trade, the long-run real interest differential and net foreign liabilities. Australia is a small commodity exporting country, subject to significant terms of trade shocks driven by the world commodity price cycle. Among OECD countries, Australia - together with New Zealand and Japan - has a very high level of volatility in its terms of trade. This arises mainly because in these countries the composition of imports differs from that of exports. In Australia and New Zealand, exports are concentrated in primary products with volatile prices, while imports are largely of manufacturers with stable prices - while in Japan the opposite is true.

Economic Policy

Economic factors can move a market in both the short-term and long-term. For instance, it is well known what reaction can be generated in AUD market the current account or CPI figures are released. While the figure for any given month can be positive or negative, it is the trend for any given month or quarter can be positive or negative, it is the trend figure that finally influences the state of the economy. However, as the monthly or quarterly figures are released, the currency is more often than not subjected to larget movements.

These movements may not always be logical. For instance, Balance of Payments (BOP) figure released in June 1999 showed a current account deficit for the first quarter of AUD $8.829 billion (5.9% of GDP, up from 5.1% a year earlier). Most observers considered this a negative factor for the AUD. However, the market reaction was to buy the currency. This was mainly because the market had been conditioned by analysts to expect a higher number, so a figure of more than AUD $8.829 billion had already been 'built into' the exchange rate.

Political Factors

Exchange markets can be dramatically influenced by political factors. A famous example was the decision by the Group of Five nations (GF) in September 1985 to collectively intervene in the market for the first time to stop the USD appreciation. However, a frantic rush to liquidate long dollar positions caused major falls in the USD's value and wide spreads were quoted by those market-makers still left in the market. Continued intervention over the following months turned the market from being bullish for the dollar, to being completely bearish.

This example combines political effecfts and central bank intervention: but political problems and statements can also cause market reaction on their own. The then Treasurer, Paul Keeting's 'banana republic' statement added impetus to a market already bent on selling AUD. The shooting of President Reagan, and the September 11 terrorist attacks also caused the exchange markets to react.

Speculation

Speculative trades can dramitically move the market. The 1997 Asian economic crisis was generall attributed to large-scale selling of Asian currencies by hedge funds. However, the impact of speculative trading depends on the supply-and-demand factor. For instance, speculation against a certain currency may meet resistance from a corporate transaction and if the size of the corporate transaction provides sufficient supply to counteract the speculative forces, for even a short period, it may be enough to reverse the trend as the speculators liquidate their position. This reversal can have a domino effect as traders scramble to take profits of limit losses. If the rate moves too far, however, the speculators may see it as a better point at which to re-establish their positions and thus the currency will find a 'level' - and the trading range will narrow.

Central Bank Intervention

If an exhange rate moves too quickly or too far in one direction it may be the subject of central bank intervention. Exchange rates affect such things as the cost of imports, the competitiveness of exports and the cost of maintaining and servicing foreign debt. Therefore, it is sometimes in the government's interest to maintain certain levels of stability in the market place.

Intervention can be direct, either by selling or buying the currency directly in the market or by altering fiscal policy, thus changing the market perception of the currency's trend. However, if the central bank wishes to smooth market conditions, its intervention will be less pronounced and may be done anonymously through through a bank or brokers, are under the strictest confidence, but sometimes central banks choose to increase the impact of intervention by making public statements or 'jawboning'.

Central bank intervention is most effective when done on a concerted basis. The combination of jawboning and concerted intervention is almost invariably successful. For example, if the G7 announces that it considers USD/JPY too high at 112 - and the Fed, the Bank of England, the European Central Bank, the Bank of Japan and other central banks, including the Reserve Bank of Australia, are all seen selling USD - the market would quickly realise that the best opportunity to make money is to be short USD at around JPY 112.

Interrelationship Between Interest Rates and Exchange Rates

Interest rates affect economic activity via a number of mechanisms. They can affect savings and investment behaviour, the spending behaviour of households, the supply of credit, asset prices and the exchange rate - all of which affect the level of aggregate demand. Developments in aggregate demand, in conjunction with developments in aggregate supply, in turn have an effect on the level of inflati0n in the economy. Inflation is also influenced by the effect that changes in interest rates have on imported goods prices, via the exchange rate, and through their effect on inflation expectations more generally in the economy.

One important determinant of the country's exchange rate is whether it has a higher or lower inflation rate than its trading partners, its exchange rate will tend to depreciate to prevent a progressive loss of competitiveness over time.

The exchange rate plays an important part in considerations of monetary policy in all countries. However, since the exchange rate also plays such an important part in adjustment to external shocks in Australia, the case for an exchange rate target - and setting monetary policy accordingly - is weak. This approach would also forgo one of the important aims of floating, which was to regain monetary control. Thus, the exchange rate has not served either as a target, or an instrument, of monetary policy in Australia since the float.

However, to achieve its overall monetary policy objectives, the Reserve Bank does undertake FX transactions:

• To maintain internal inflation and external currency stability and to preserve orderly conditions in the Forex market. The Reserve Bank's role is to ensure that any market adjustment to the currency rate is orderly and well-based. Markets can occasionally lose focus with underlying economic fundamentals and overshoot; on such occasions the Reserve Bank can provide the contrary trade to slow the market and give it time to reassess the appropriateness of the exchange rate to prevailing fundamentals.
• To cover sales of FX to its customers, principally the Commonwealth Government (eg. payments for defence equipment, funding of embassies and servicing of overseas debt). In this role, the bank also acts as advisor to the Government on the intraday timing of its purchases of FX from the Reserve Bank.
• The RBA manages Australia's FX reserves which amount to over AUD 40 billion invested in a range of currencies. From time to time, the RBA deals in the market to adjust the mix of the currencies it is holding.
• To assist daily management of liquidity in the domestic money market, or implementation of monetary policy, the RBA may undertake FX swap transactions to use foreign assets as opposed to domestic securities, to impact on domestic money supply.

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Market Wrap - 14 November 2007

USD: The dollar fell against most major currencies on Tuesday, resuming a long-term decline after a respite from previous sessions. On Wednesday, the U.S. government will release its October retail sales report which will be scrutinized for any signs weakness in the housing sector has hurt consumer spending.

EUR: The Euro dollar traded higher towards 1.4650 despite Germany’s ZEW survey disappointing. The survey of economic sentiment worsened from -19 in October to -30.0 in November, well below the expected -20. Data releases out of the Eurozone were on the whole disappointing on Tuesday. French CPI edged up more than expected while Eurozone industrial production fell 0.7% m/m in September, worse than the expected 0.2% decline.

JPY: The dollar was higher against the Yen; however, as the Japanese currency fell from an 18-month high against the dollar after comments from Japan's prime minister abruptly ended the unwinding of carry trades that had pushed the unit higher in recent days. Japanese Prime Minister Yasuo Fukuda told the Financial Times that the yen was appreciating "too fast" and speculators needed to be careful to avoid the possibility of intervention. Dealers had previously been rapidly unwinding risky trades, increasing volatility in the currency and equity markets. The low-yielding yen had surged in recent days as renewed fears that credit-related problems could spread to the wider U.S. economy sapped risk appetite among investors, prompting them to buy back yen they had sold to fund purchases of higher-return currencies in carry trades.

AUD: The Australian dollar advanced past 90 U.S. cents on Wednesday as firmer regional stock markets encouraged investors to return to riskier positions in high-yielding currencies. Asian stocks tracked big gains on Wall Street, where the market benefited from favorable comments by Goldman Sachs on asset write downs and from a surprisingly strong retail sales report from Wal-Mart Stores Inc.

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Forex Overview

1. Introduction: What is Forex?

The Forex market (Foreign exchange Market) is the market in which currencies are bought and sold. For example, a market participant is able to receive Australian dollars by paying a specified amount of US dollars. In effect the trader has bought Australian dollars and sold US dollars.

The prices of currencies that are set in the market are determined by the amounts that buyers and sellers are willing to pay. For example if there are more participants in the market that want to buy Australian dollars, than want to sell Australian dollars at a specific price then the price of the Australian dollar will rise until it reaches a price where there is an equal amount of participants willing to buy and sell at the same price.

Profits can be made in the Forex market due to movements in the prices of currencies. The idea is; if you were to buy a currency at a lower price than you sell it for, you have made a profit equal to the difference in the two prices. This is made possible by the simple fact that the price of the currency has changed. If the prices of currencies are constantly changing by large amounts (the market is volatile), there is greater potential for higher profits to be made. The Forex market is recognized as one of the most volatile markets in the world.


2. History of Forex

Prior to 1971, an agreement known as the Bretton Woods Agreement stopped speculation in the currency markets. It was set up in 1945 with the intention of stabilizing international currencies and preventing money fleeing across nations. This agreement fixed all national currencies against the dollar and set the dollar at a rate of $35 per ounce of gold. Prior to this agreement the gold exchange standard had been used since 1876. The gold standard used gold to back each currency and thus prevented kings and rulers from arbitrarily debasing money and triggering inflation. Institutions like the Federal Reserve System of the United States have this kind of power.

The gold exchange standard had its own problems however. As an economy grew it would import goods from overseas until it ran its gold reserves down. As a result the country's money supply would shrink resulting in interest rates rising and a slowing of economic activity to the extent that a recession would occur.

Eventually the recession would cause prices of goods to fall so low that they appeared attractive to other nations. This in turn led to an inflow of gold back into the economy and the resulting increase in money supply saw interest rates fall and the economy strengthen. These boom-bust patterns prevailed throughout the world during the gold exchange standard years until the outbreak of World War 1 which interrupted the free flow of trade and thus the movement of gold.

After the war the Bretton Woods Agreement was established, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar. A rate was also used to value the dollar in relation to gold. Countries were prohibited from devaluing their currency to improve their trade position by more than 10%. Following World War II international trade expanded rapidly due to post-war construction and this resulted in massive movements of capital. This destabilized the foreign exchange rates that had been set-up by the Bretton Woods Agreement.

The agreement was finally abandoned in 1971, and the US dollar was no longer convertible to gold. By 1973, currencies of the major industrialized nations became more freely floating, controlled mainly by the forces of supply and demand. Prices were set, with volumes, speed and price volatility all increasing during the 1970's. This led to new financial instruments, market deregulation and open trade. It also led to a rise in the power of speculators.

In the 1980's the movement of money across borders accelerated with the advent of computers and the market became a continuum, trading through the Asian, European and American time zones. Large banks created dealing rooms where hundreds of millions of dollars, pounds, euros and yen were exchanged in a matter on minutes. Today electronic brokers trade daily in the forex market, in London for example, single trades for tens of millions of dollars are priced in seconds. The market has changed dramatically with most international financial transactions being carried out not to buy and sell goods but to speculate on the market with the aim of most dealers to make money out of money.
London has grown to become the world's leading international financial center and is the world's largest forex market. This arose not only due to its location, operating during the Asian and American markets, but also due to the creation of the Eurodollar market. The Eurodollar market was created during the 1950's when Russia's oil revenue, all in US dollars, was deposited outside the US in fear of being frozen by US authorities. This created a large pool of US dollars that were outside the control of the US. These vast cash reserves were very attractive to foreign investors as they had far less regulations and offered higher yields.

Today London continues to grow as more and more American and European banks come to the city to establish their regional headquarters. The sizes dealt with in these markets are huge and the smaller banks, commercial hedgers and private investors hardly ever have direct access to this liquid and competitive market, either because they fail to meet credit criteria or because their transaction sizes are too small. But today market makers are allowed to break down the large inter-bank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).


3. The History of Retail Forex

Retail trading, is more structured than the Forex market as a whole. While Forex has been traded since the beginning of financial markets, modern retail trading has only been around since about 1996. Prior to this time, retail investors were limited in their options for entering the Forex market. They could create multiple bank accounts, each one denominated in a different currency, and transfer funds from one account to another in order to profit from fluctuating exchange rate. This was troublesome, however, because the transaction costs incurred were large due to the small quantity of funds being converted relative to the size of the market. This transaction type was at the very bottom of the Forex pyramid.

By 1996, new market makers took advantage of developments in web-based technology that made retail Forex trading practical. The new companies felt that there was enough liquidity in the Forex market, and eventually within their own customer base, to guarantee markets under all but the most unusual market conditions. These companies also created online trading platforms that provided a quick and easy way for individuals to buy and sell on the Forex Spot market. In addition, the companies realized that by pooling many retail traders together, they had the size to enter the upper echelons of the Forex market, which reduced the size of the spread. As the business grew, the market makers were given better prices, which they then passed on to the customer.


4. Forex Market Participants

Central Banks
A Central Bank will intervene to buy or sell currencies if they believe it is substantially under or overvalued and that it is having a negative effect on the economy. The national central banks play a key role in the foreign exchange markets as many central banks have very substantial foreign exchange reserves, thus their intervention power is significant

Commercial Banks
Banks are licensed deposit taking institutions; they also support a variety of other services including foreign exchange. These banks will trade currencies among themselves as part of the system of balancing accounts. While exchange rates for their largest customers are extremely competitive, small and medium sized enterprises and individuals will typically pay a large premium when transacting foreign exchange with their local branch. The interbank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis.

Non Banking Corporations
This group comprises of companies who are involved in the 'goods' market, conducting international transactions for the purchase or sale of merchandise. Exporters are made up of a diverse range of companies exporting goods and services. Generally, exporters have a positive impact on the value of a country's currency. Importers use the foreign exchange markets to purchase foreign currency to make payments for the goods and services they have bought in other countries. They generally have a negative impact on the value of a country's currency. Their trade sizes are most often inconsequential to affect immediate moves in the market, given the large volume traded daily on the Forex market. However since a major key factor for long term trend of currency movements is the balance of trade, if taken as a whole the capital flows arising from these corporations end up having a significant impact.

Hedge Funds
Their influence has increased significantly in the last few years thanks to the overall growth in their industry and abundance of funds at their disposal; however the net effect of this group depends on the investment decisions they make. With the growth of the FX industry they have been, where possible, investing heavily in foreign securities and other foreign financial instruments.

Brokers
They can classified into Interbank and Client brokers with the influence of the former declining in the last few years due o the shift of businesses to electronic trading systems. The advent of online pricing systems has revolutionized the operational capabilities of this market and changed the traditional role of brokers. But even in the past, most banks were unable to service the needs of small to medium sized organizations as well as commercial & private clients with large corporations their main targeted market. Thus keeping in mind the client's needs ability to invest a certain amount of minimum margin and still be able to trade on competitive spreads led to the advent of Online Broking Companies and ForexCT.com belongs to this group.

Investors/Speculators
Given that the Forex market has high liquidity, a large amount of leverage and the 24/7 operational nature of the market, it has been an attractive playing field for speculators. The service provided by speculators to a market is primarily that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier for others to offset risk, including those who may be classified as hedgers and arbitrageurs


5. Major Currencies

US Dollar
$USAlso referred to as the dollar, greenback and buck.
The US Dollar was adopted by the Congress of the Confederation of the United States on July 6, 1785 and is the most used in international transactions. Several countries use the U.S. dollar as their official currency, and many others allow it to be used in a de facto capacity.

In 1995, over US$380 billion were in circulation, of which two-thirds was outside the United States. By 2005, those figures had doubled to nearly $760 billion with an estimated half to two-thirds being held overseas, which is an annual growth of about 7.6%. However, as of December 2006, the dollar was surpassed by the euro in terms of combined value of cash in circulation. The value of euro notes in circulation has risen to more than € 610 billion, equivalent to US$800 billion at the exchange rates at this time.
The U.S. dollar uses the decimal system, consisting of 100 (equal) cents (symbol ¢).

The Euro - €
The euro (currency sign: €; banking code: EUR) is the official currency of the European states of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain - also known as the Eurozone - and is the single currency for more than 317 million people in Europe.
Including areas using currencies pegged to the euro, the euro affects more than 480 million people worldwide, with more than €610 billion in circulation as of December 2006.

While all EU member states are eligible to join if they comply with certain monetary requirements, the euro is not used in all of the European Union as not all EU members have adopted the currency. All nations which have recently joined the EU are pledged to adopt the euro in due course, but the United Kingdom and Denmark are under no such obligation. Several small European states (The Vatican, Monaco and San Marino), although not EU members, have adopted the euro due to currency unions with member states. Andorra, Montenegro and Kosovo have adopted the euro unilaterally.

The Yen - ¥
The yen or (Japanese yen) is the currency of Japan. It is also widely used as a reserve currency after the United States dollar and euro.

The Great British Pound - £
Other Names - Sterling, Cable and the Pound (symbol: £; ISO code: GBP), divided into 100 pence, is the official currency of the United Kingdom and the Crown Dependencies. The slang term "quid" is very common in the UK.
The official full name pound sterling (plural: pounds sterling) is used mainly in formal contexts and also when it is necessary to distinguish the currency used within the United Kingdom from others that have the same name. The Sterling is the third most traded currency in the world, after the US dollar and the euro.


The Swiss Franc - CHF
The franc (ISO 4217: CHF or 756) is the currency and legal tender of Switzerland and Liechtenstein. The Italian exclave Campione d'Italia and the German exclave Büsingen also use the Swiss franc. Franc banknotes are issued by the central bank of Switzerland, the Swiss National Bank, while coins are issued by the federal mint, Swissmint.

The Swiss franc is the only version of the franc still issued in Europe. Its name in the four official languages of Switzerland is Franken (German), franc (French and Rhaeto-Romanic), and franco (Italian). The smaller denomination, which is worth a hundredth of a franc, is called Rappen (Rp.) in German, centime (c.) in French, centesimo (ct.) in Italian and rap (rp.) in Rhaeto-Romanic. Users of the currency commonly write CHF (the ISO code), though SFr. is still common. SwF has been used in some publications but is not an official abbreviation.

The current franc was introduced in 1850 at par with the French franc. It replaced the different currencies of the Swiss cantons, some of which had been using a franc (divided into 10 batzen and 100 rappen) which was worth 1½ French francs.
In 1865, France, Belgium, Italy, and Switzerland formed the Latin Monetary Union where they agreed to change their national currencies to a standard of 4.5 grams of silver or 0.290322 grams of gold. Even after the monetary union faded away in the 1920s and officially ended in 1927, the Swiss franc remained on that standard until 1967.

As of November 30, 2006, the Swiss franc was worth US$ 0.826729 or € 0.628625. Since mid-2003, its exchange rate with the Euro has been stable at a value of about 1.55 CHF per Euro, so that the Swiss Franc has risen and fallen in tandem with the Euro against the U.S. dollar and other currencies.

The Swiss franc has historically been considered a safe haven currency with virtually zero inflation and a legal requirement that a minimum 40% is backed by gold reserves. However this link to gold, which dates from the 1920s, was terminated on 1 May 2000 following an amendment to the Swiss Constitution. The Swiss franc has suffered devaluation only once, on 27 September 1936 during the Great Depression, when the currency was devalued by 30% following the devaluations of the British pound, U.S. dollar and French franc.


The Australian Dollar
The Australian dollar (currency code AUD) has been, since 14 February 1966, the currency of the Commonwealth of Australia, including Christmas Island, Cocos (Keeling) Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu. It is normally abbreviated with the dollar sign $. Alternatively A$ or $A, $AU or AU$ is used to distinguish it from other dollar-denominated currencies.

It is sometimes affectionately called the "Aussie battler"; during a low period (relative to the U.S. dollar) around 2001 and 2002 the currency was sometimes locally called the "Pacific Peso". It is divided into 100 cents.

The Australian dollar is currently the sixth-most-traded currency in world foreign exchange markets (behind the U.S. dollar, the euro, the yen, the Pound sterling, and the Swiss franc), accounting for approximately 4-5% of worldwide foreign exchange transactions. The Australian dollar is popular with currency traders due to the relative lack of government intervention in the foreign exchange market, the general stability of the economy and government as well as the prevailing view that it offers diversification benefits in a portfolio containing the major world currencies (especially because of its greater exposure to Asian economies and the commodities cycle).

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