Arthemiaku

The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. [1]FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system until 1971.

Presently, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.[2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]



The purpose of FX market is to facilitate trade and investment.

The need for a foreign exchange market arises because of the presence of multifarious international currencies such as the US Dollars, Euro, Japanese yen, Pound Sterling, etc..., and the need for trading in such currencies.

FX markets are continuing to respond well to the resurgence of risk appetite with risk corrolated currencies moving lock-n-step. The recent catalyst was the better than expected Goldman Sachs second quarter results. This pushed US equities higher (although still down for the month) and continues to resonate positively across asset classes. Crude wti prices are up 1.50% to $60.44bll, while gold traded shortly above $936.00oz before retracing slightly. The EURUSD continues to catch a strong bid on the medium term uptrend, but is still struggling with the noise in front, around the 1.4050 / 80 levels. While we are cautious about the sudden shift in optimism, especially during these summer doldrums, we believe the recent pullback in risky assets has provided traders with a strong setup, should risk appetite entrench itself. Along the lines of rally in risk-correlated assets, the AUDUSD is following commodities higher for a test of 0.8000 psychological resistance. Another factor that has supported the recent rally was the positive US retail sales and PPI (which helped offset an earlier negative German ZEW economic sentiment release 39.5 vs. 47.8 exp).


While many economists point to the large contribution of gasoline prices, overall participants spun it as positive. Back tracing slightly from the recent BoE meeting, which MPC members opted not to expand their QE program, BoE Deputy Governor Charles Bean attempted to clarify the point that "We are committed to buying £125bn of assets that will take us through to August. We decided last week there was no need to make a firm decision. August is when we publish papers on the economy and it's a natural point at which to take stock", sound very much like expansion is a high possibility given the forecasted economic climate.

The initial market reaction was GBP positive, as it affirmed policy makers commitment to QE. However, while the core driver of sterling will continue to be global fx trends, we think that expansion could erode the markets confidence in the UK . In Japan, the BoJ wrapped up its two-day meeting deciding to hold rates at 0.10% as was universally expected.

However, one policy change was the extension of their temporary asset purchases and funding operations. In addition, the BoJ adjusted their growth forecasts lower to -3.4% and 1.0% in 2009 and 2010 respectively. As with the sterling, larger trend will define prices. However, with risk appetite coming back into play and the domestic economy still fragile, we expect the JPY to come under significant selling pressure. We now doubt the markets commitment to test the USDJPY 90 level. With a rash of scheduled releases, including the FOMC minutes (no major surprises expected) and additional corporate earnings our pro-risk trades will be nimble but overall favour selling USD and JPY.