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| Friday, September 25th, 2015

HOW DO I LEARN MORE ABOUT FOREIGN CURRENCY MARKETS?

There are a lot of technical terms and data which is usually associated with currency markets and the financial markets as a whole of which exchange rates are part of. These may be easy to understand if you have been working in the industry for a while but for some people it might has well be in a completely different language. Many newspapers, magazine and websites provide commentary on the currency markets. Below are a few helpful insights to understanding the market if you plan to learn more.

The currency markets are often based on many short term factors and are likely to have more impact on your everyday lives as opposed to the stock or bond markets. Whether you are going on holiday, sending money to friends abroad or emigrating, the exchange rate will denote how much money you or your business will need to send or will receive. With this in mind, here are some of key terms to understand when looking at these kinds of currency market reports:

  • Rallying: If one a currency is rallying against another, this means that the currency is performing better against its counterpart and hence has more buying power. Example: If Sterling (GBP) is rallying against the US Dollar (USD) you will be able to get more US Dollars for every pound that you have. Therefore if the exchange rate changes from 1.5 to 1.75, for every £100 you receive $175 instead of $150.
  • Reaction: Is the opposite of a rally and therefore (in our example) you will have less US Dollars to spend for every pound you convert.
  • Cable: Is another expression for the conversion from GBP to USD.
  • Interbank rate: Is the rate at which banks buy and sell currency. Billions of dollars are traded each day by banking corporations. When individuals buy currency it is offered at a margin off the interbank rate so that banks and other financial institutions make a profit from selling you this currency.
  • Bullish or Bull market: If a particular currency is described as bullish, this means that investors are buying lots of that particular currency, and as a result that currency will perform favourably. So if we go back to the example of GBP/USD, if the market is bullish GBP that will mean you can buy more US Dollars for every pound and vice versa. ‘Bearish’ or ‘Bear market’: This is the opposite of a bull market, meaning investors are selling or looking to sell a particular currency. (The ‘Bull’ and ‘Bear’ markets not only apply to currency but other securities such as stocks and bonds as well as entire markets.)
  • Forward Contract: This where you can order foreign currency for a fixed rate in the future. This is usually available for large transfers. The benefits of a forward contract are that if you think that the current exchange rate is favourable but you want to make the transaction sometime in the future you can use a forward contract, there may be a slight premium to use these services but is still likely to save you money.
  • Limit Order: If you have a specific rate in mind for which you would like to carry out your transaction, you can place a limit order. This is so that when it gets to your desired level your account manager can carry out the transaction.

The use of forward and limit order contracts are usually done through foreign currency specialists. Foreign currency specialists are a very realistic alternative to using your bank for transferring large amounts of money (usually over £5000 in the UK). FX Compared advocate the use of foreign currency specialists as the margin that they offer is much closer to the inter-bank rate than that which your bank will offer you. They also charge little or no fee for their services whereas banks may charge upwards of £40 for a single transaction.

Although all these specific terms may not be that important to you, the movement of currencies could have a dramatic effect on you or your business. This is especially apparent when purchasing property abroad or making large import orders, as on a number of occasions the exchange rate may result in you having EUR20,000 less than you envisaged for your dream home or your order of goods costing EUR20,000 more.

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