It took a few years for investors and traders to be attracted to the forex futures contracts and the CME modified some contract specifications during that time. Once the attraction for the FX markets occurred by traders, investors and hedgers, the currency sector was here to stay. The success of the forex markets motivated the exchanges to develop other financial futures markets. Currencies, just like stocks or commodities, may be volatile at times, but they have a commercial use. The FX market is utilized by exporters, importers, manufacturers, banks, shippers, government agencies, central banks and anyone doing business in a foreign country or with foreign counterparts to either translate foreign currency into their local currency or to translate their local currency into foreign currency. The futures contracts as well as the interbank markets were initially used for hedging purposes. It gives the user the ability to lockin profits or costs for their forex exchange transaction. It is a 24-hour market from Sunday evening (basis the U.S) to Friday end of trading day. The FX market is global and is the deepest and most liquid market in the world. Many investors perceive the U.S. stock market to be very liquid, and it is. However, the value of trades made in a day in the FX market dwarfs the value of the New York Stock Exchange. As noted by Reuters, the average daily value of FX transactions in March reached a new high of $5 trillion.iv The FX market plays a very vital role in the commodity market. Most commodities are quoted in U.S. dollars. If the dollar rises, it may cause commodities to fall in price because the dollar based commodities become more expensive when translated into other currencies. The monthly charts below demonstrate the years of crude oil rallying while the U.S. dollar was falling. Also the monthly chart of the Commodity Research Bureau Index (CRB) has been quietly increasing as the dollar has been trending lower over the last 25 years. Just the opposite is true if the dollar falls.
Source: www.barchart.com
Source: www.barchart.com
It may cause a price rise in commodities as the price becomes cheaper relative to other foreign currencies causing an increase of demand for the product and thus an increase in pricing of the product. This could be one of the reasons for oil or grains to rally. Canada and Australia are commodity based economies. As commodities rise, you may see the Canadian and Australian dollar rally. The chart below shows the Australian dollar moving relative to both the U.S. dollar and the CRB Index. Currencies are also indicators of confidence and uncertainty. They take on a view of value relative to other currencies. Last
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year when the Euro reached 1.19 it was based on a view of a growing probability of the Eurozone to vanish as many thought several of the Eu countries would withdraw their membership and return to printing their own currency. This didn’t happen and currently the Euro is valued at 1.3 U.S. dollars to the Euro. The popularity of trading currencies continues to increase by professional money managers and individual investors. According to Barclayhedge, in 1999 Commodity Trading Advisors (also known as CTAs) had an estimated $6 billion of assets under management with CTAs who Micro-Cap Review Magazine
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