Take full advantage of exchange rate movements with a vast array of FX tools
Exchange rates are influenced by an intricate web of factors, including the following important long-term considerations:
Interest rate:a high interest rate leads to capital inflow and currency appreciation. In contrast, a low interest rate drives capital outflow and imposes depreciation pressure on the currency;
Inflation and deflation: countries experiencing inflation are inclined to raise interest rates, which causes currency appreciation, and vice versa for deflation;
Trade surplus: countries with a trade surplus - total income exceeding total expenditure - may see their currencies strengthened against other foreign currencies;
Drastic changes in political situations: examples include political conflict, military conflict, elections and government reshuffling. These events may destabilise the exchange rate of the related currency.
One current example is the referendum that is to be held in the UK in June, which will decide whether Britain should leave, or remain in, the European Union ("EU"). The market is worried that a so-called "Brexit" - the second largest economy in the EU exiting the partnership - would not only cost the EU USD3 trillion worth of GDP, but would also set a precedent for other members to consider leaving the EU, shattering market confidence on the union. With these simmering concerns, the exchange rate of the British Pound against the USD dropped by more than 5% this year to the lowest level seen in six years. This is evidence that the development of a country, geographical situations and economic and political circumstances can all affect the future direction of exchange rates.
Foreign exchange investments are available in a wide variety of formats, and among the most popular are spot exchange rate, spot contract, futures, options, forwards and margin trading (Margin FX). Spot transactions, usually done through banks, involve the selling of one foreign currency while purchasing another, with the price based on the real-time exchange rate in the international foreign exchange market. To carry out a spot transaction, investors must hold a sufficient amount of the currency that is to be sold.
For investors constrained by a limited amount of capital but who are determined to maximise their returns, margin trading may offer a solution. In margin trading, investors have to deposit a sum of initial capital with a bank or brokerage firm as collateral. Then, the bank or brokerage firm grants a loan to the customer. The loan size is determined by the leverage ratio agreed upon by both parties. By increasing the amount of investment capital, investors can amplify their returns. However, if the direction of currency movement works against you, losses will be magnified in multiples too.
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