Future Returns: The Risk and Reward of Foreign Currency Exchange Markets - Barron's
Future Returns: The Risk and Reward of Foreign Currency Exchange Markets - Barron's |
| Future Returns: The Risk and Reward of Foreign Currency Exchange Markets - Barron's Posted: 30 Apr 2019 11:22 AM PDT  Individual investors are increasing entering the foreign currency exchange markets, despite its challenges. AFP/Getty Images While most advisors recommend leaving the foreign currency exchange market to the pros, individual investors are increasingly entering the market as accessibility through online trading platforms has improved. They're drawn to it for the precise reason that most stay away: The forex market is the largest and most liquid market in the world in which fortunes can swing on a fraction of a penny. Simply put, it's exciting—but very risky. For those who want to jump in, do so with an understanding of the risks and unique characteristics of the market, says Marc Chandler, managing partner and chief investing strategist at Bannockburn Global Forex, a trading firm specializing in currency. "Some people are so rich they get into it for the entertainment, but it can be an expensive form of entertainment," he says. Profit in Fluctuations Currency investors aim to lock in a profit through fluctuating exchange rates, which are the prices you pay for one currency in exchange for the other. Because the value of a currency is relative to another, trading occurs in currency pairs, such as the euro versus the U.S. dollar (EUR/USD) or the British pound versus the Japanese yen (GBP/JPY). Investors who believe that the euro will strengthen against the dollar, might buy euros with dollars. If the euro appreciates, these investors can then convert the euros back to dollars to lock in a profit. While there are more than 100 global currencies, the U.S. dollar is the benchmark and accounts for about 90% of the more than US$5 trillion in forex trading volume. The currency market is more volatile than the bond market, but less volatile than individual stocks. But big profits—or losses—are turned on tiny fluctuations in exchange rates, often by a penny or less. Because of this, investments must be large to be able to make any significant profit. So investments are generally highly leveraged by as much as 100 to 1 or more. For every US$1,000 put up by an individual, a broker will put US$100,000 to work in the market. This works great if the trade works in the investor's favor, but the risk of losing far more than the initial out-of-pocket investment is significant. Another challenge for individual investors is that unlike the securities markets, currency markets churn around the clock—there's no opening bell or end-of-day close at which point traders can take a deep breath and get some sleep, Chandler says. "If a doctor comes home and wants to play around in the stock market, O.K. But in foreign exchange, while she's in the middle of surgery, she isn't watching the market—that may not work so well," he says. And while with stocks and bonds, you can decide to invest in a sector or region that you feel competent keeping tabs on, "currency markets are driven by numerous factors and events around the world—by what the European Central Bank or the Bank of Japan is doing, for instance," he says. "You have to be aware of other countries' politics and their fiscal policies—of so many more things." Three Ways to Make Money in Forex While Chandler says he keeps discovering new ways to lose money in the forex market, "there are only three ways to make money." The first is a straightforward momentum story in which you buy to benefit from an upward trend. The second is a mean reversion strategy, in which a trader identifies a currency's trading range and bets that it will return to that range after deviating. The third way is through interest rate arbitrage through a so-called carry trade. Even if exchange rates between two currencies remain stable, traders can make money on the difference in countries' interest rates by pairing a currency with a low interest rate, such as the Japanese yen (which has a rate of -10%), with a high interest rate currency, such as the Australian dollar (currently 1.5%). With Japan's markets currently closed for 10 days to mark the ascension of a new emperor, the yen is projected to remain stable, Chandler says. "So during this period, I can sell yen and buy the Australian dollar, and I can pick up the interest rate differential." Standard ways to access currency markets are through real-time spot trades—by far the biggest part of the forex market; through futures contracts, which commit you to buying or selling currencies at a specified price later; or by trading options, which give you the choice to buy or sell at an agreed upon price. For spot trades and futures, investors need to open a foreign exchange brokerage account, while the options investments can be made through a standard brokerage account and trade over the Philadelphia stock exchange, Chandler says. But if the risks, mechanics, and processes of the forex market are too daunting, there is another avenue: currency ETFs. There are ETFs that track a basket of currencies such as Invesco CurrencyShares Euro Trust (FXE), which tracks 19 European Union currencies, or specific currencies such as WisdomTree Chinese Yuan Strategy Fund (CYB) or CurrencyShares Australian Dollar Trust (FXA). The beauty of these ETFs is that they allow investors to dip their toes into the market with a pro at the helm and without having to commit a great deal of capital or take on large leveraged positions, Chandler says. But while they may be low risk, returns are generally modest and investors who are looking for a challenge may be disappointed, says Chandler, who likens currency trading to playing a three dimensional chess match. "Investing in stocks is like playing chess in on one level. But investing in currencies is like playing three levels of chess at once." So before jumping in, be sure to summon your inner Bobby Fischer.  |
| Govt to avail forex to business community - zbc.co.zw Posted: 30 Apr 2019 11:03 AM PDT  Honourable Monica Mutsvangwa Government has put in place mechanisms to ensure foreign currency is availed to the business community to procure raw materials for the production process and curb the prevailing prices hikes. Presenting this week's cabinet briefing in Harare, the Minister of Information, Publicity and Broadcasting Services Cde Monica Mutsvangwa also revealed that wheat inputs which can cover 77 000 hectares have been distributed to farmers under command agriculture. She also said the much awaited Air Zimbabwe embraer plane has arrived in the country. Cde Mutsvangwa said Cabinet resolved to avail foreign currency earned from tobacco and other forex generating avenues which will soon be disbursed to the business community to stabilise price hikes. Cabinet also received reports on the state of agriculture where wheat inputs which will cover over 77 000 hectares have been distributed to farmers under command agriculture and a report on the delivery of the new embraer plane which will be commissioned by the President Cde Emmerson Mnangagwa soon, was presented. A comprehensive update on the aftermath of Cyclone Idai was also presented to Cabinet highlighting the continuing distribution of food, efforts to restore potable water supplies, road and other networks and rehabilitation programmes which have seen over 20 schools repaired. President Mnangagwa is scheduled to hold a meeting with 12 chiefs from Chimanimani and Chipinge to deliberate on the early recovery plan on the 2nd of May. Arrangements are also underway for the President to visit Dombwe in Mozambique where some victims of Cyclone Idai where buried, to thank Mozambicans for according dignified burials to Zimbabwean victims of the cyclone.  |
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