4.02.2009

What The Market Expects - And Is Likely To Get - From The G 20 Summit

There are very few market events that have the potential to move all asset classes, fundamentally change investor sentiment and redefine global growth forecasts. Given the state of the worldwide economy and ongoing financial struggles though, the April 2nd Group of 20 (G 20) summit in London certainly holds that potential.

Historically, these periodic gatherings of leaders from some of the world’s largest economies have yielded little. However, this time around, the sentiment seems to be that conditions are so dire and stability so fragile that these heads of state cannot afford to leave this meeting without an actionable plan to turn things around. Such a prognosis doesn’t guarantee cooperation though. And, in fact, there has been clear conflict in the demands and concerns that have been noted by key participants before the official meeting. With so many contingencies and scenarios; it is important to break down the major themes that will be broached, the probability of reaching an agreement on each topic and what impact it may have on the currency market.

The Major Issues

Globalization has been hailed as a means for increasing trade and spreading wealth around the world; but these positive consequences are espoused in times of strength. Now, with the World Bank forecasting a 2.1 percent contraction in global GDP through 2009, each nation is desperately looking for the means to bolster its own economy. As the plunge intensifies, however, there is a growing consensus that the only real solution to the borderless problem is a coordinated response from the largest players. On the other hand, conditions have not yet gotten to the point that where 20 of the world’s largest economies are willing to sacrifice their own agenda’s and policies to easily reach an agreement on the many problems that stand before them. Therefore we will only cover the three most publicized and potentially market-altering issues.

1. Global Regulation – In the period following the Dot.com bubble and preceding the current financial crisis, the markets were flooded with capital. Market returns grew to impressive double digit levels; and investors’ desires to generate profit above and beyond this benchmark led to the excessive use of leverage and the development of new financial derivatives backed by little or no tangible collateral. When the house of cards began to come down, it was this bottleneck that turned a downturn into a panic with frequent seizures in liquidity. Looking for the culprits to this dour state of affairs, global leaders have suggested better regulation of hedge funds and large pools of private capital, over-the counter derivatives markets, international banks, executive compensation, and supposed tax shelters. France has shown particular interest in this point ahead of the meeting and many other nations have set it as an agenda on their own, making it a key subject at the meeting.

Likelihood of G20 Policy: High – In determining the likelihood that policy makers will be able to come to an agreement on any single issue, success is measured by the possibility of stepping on the fewest toes. When it comes to regulating many of the obvious excesses that have led the global economy to its current state, there is likely to be little opposition. However, there are a few sub categories to this theme that will meet greater resistance – labeling a country a tax haven and defining sanction for example will be difficult to accomplish.

2. Coordinated Stimulus / Bailout – A duel financial crisis and economic recession has forced many of the world’s governments to inject liquidity in the markets, bailout key financial institutions and increase fiscal spending dramatically. There are very few countries that have not taken these steps to stabilizing their own economies. However, a coordinated requires significant compromise. Those nations that have suffered deeper contractions and have had to put more capital in the fire will require more spending from their counterparts. The International Monetary Fund’s (IMF’s) recommendation to use at least 2 percent of GDP towards financial stimulus will be a likely benchmark for those advocating increase spending.

Likelihood of G20 Policy: Low – A coordinated effort to increase financial stimulus brings with it heavy political connotations. To have the funds necessary to spend such incredible amounts of money requires a government to take on massive amounts of debt. Germany and France have both voiced opposition to such a move, leading the stance in the European Union that the 400 billion euros already dedicated to the issue would be enough. German Chancellor Angela Merkel has been among the most vocal opponents to this policy suggestion, suggesting that spending untold billions would instead feed the next crisis. This is a hot button issue and with only one day to work with, is unlikely to much progress.

3. New Reserve Currency – Since the birth of global trade and finance, there has been the need for a common unit of exchange to facilitate transactions and price goods. Before World War I, the world was on the Gold Standard. With the Bretton Woods System, the US currency was established as the new reserve by fixing a given amount of gold to a certain number of dollars. And, though this arrangement was abandoned in the 1970s, we have seen the dollar hold its defacto title through market interest alone. The greenback is held in central bank reserves, used to price commodities and is the peg for many emerging market economies. In record years though, there has been a slow but steady swap for over-weighted dollar holdings to something more akin to a basket. Nonetheless, the dollar is still by far the most commonly held currency and is in turn the most actively traded.

Likelihood of G20 Policy: Very Low – There has long been an argument for weaning the world off the ‘dollar standard,’ and for good reason. Using a single unit of exchange for so many different purposes exposes the world to the volatility of that currency. In light of the extreme conditions that have developed over the past 18 months, there is good reason for China and Russia (to vocal proponents of this point) to bring this consideration to the table. Even so, there is little probability that this issue will lead to a new “super sovereign reserve currency.” There are too many economies that rely on this standard and actually changing it would be a tall order. And, realistically, with the immediate health of the global economy and financial markets at stake, there are bigger problems to tackle.

What Currency Traders Should Be Watching

Dollar – The greenback is exposed to all of the major themes listed above. It is well known that the US has taken some of the most aggressive steps towards stabilizing its own growth and financial markets (and some say the effort has been aimed to bolster global growth and markets). If there is a coordinated effort that comes out of this meeting, it would take a lot of the pressure off the US government’s shoulders. On the other hand, a snub would work the currency’s safe haven status. Regulation has been a frequent point on the agendas of the US Congress and President; so an agreement on a global scale would offer little price action. And, clearly, the threat to the dollar’s reserve status is direct and prominent. Though the market considers such an agenda making it to a vote, the confirmation that its rank is unscathed will nonetheless encourage bullish sentiment.

Euro – It has long been the sentiment surrounding the euro that the Euro Zone was in a better position to weather the global crisis than its international counterparts and that its interest rates would be able to hold up for the eventual recovery (providing a yield advantage that could encourage a quick rebound in the currency). However, a ballooning domestic recession and local financial troubles have put these perceived advantages at stake. Should the French and German leaders given in to a coordinated stimulus effort, it would be taken as a sign that the Euro Zone is in no better a position than the US or UK. There will also be modest interest in the potential for sweeping regulation (as it would bring tax revenue) and the potential for a new reserve currency (the euro is the number two most actively traded currency).

British Pound – The UK is considered be in the worst economic shape of the industrialized world. There have been nine different initiatives introduced by Prime Minister Gordon Brown and the Parliament; yet Europe’s second largest economy has not seen the benefit of these proposals. There is no better country to use in arguing that the crisis is global and not the sum of many individual recessions. Should there be an agreement on a coordinated effort to recharge growth, it would likely be considered the most promising fix offered the United Kingdom and would be a significant relief for the British government and tax payer.

Japanese Yen – For more than a decade, the Japanese yen has had one role in the currency market: safe haven. However, fundamental function was thrown into question when a severe contraction in 4Q GDP led many to evaluate the true safety to the Japanese economy and its assets. Authorities have forecasted a harsh contraction through 2009 (even compared to a global economy that is forecasted to suffer its worst slump since WWII) and investors are growing more critical of the risk/reward in seeking liquidity and safety in Japan. Prime Minister Taro Aso has called on other global leaders to increase fiscal stimulus to promote growth in their own economies; and a coordinated effort to do so would be considered a benefit to growth and thereby demand for Japanese exports.

Written by John Kicklighter, Currency Strategist
Article Source - What The Market Expects - And Is Likely To Get - From The G 20 Summit
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What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.


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. Forex 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 world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex 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 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. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex 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 US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.

Currencies

Currencies
List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!