From foreign policy to emergency response, USA Forex brokers eye political candidates and their platforms for possible clues about upcoming market trends post election. Pollsters still expect the possibility of a Blue wave, with the Democrats winning the presidency, Congress, and the Senate. As of publication, US election polling shows former Vice President Joe Biden enjoying a comfortable lead over Donald Trump, averaging a steady 8-point lead over the last three months. However, Hillary Clinton also polled well in the 2016 presidential election before Trump beat her with a slight edge in the electoral college vote. History has shown that you can’t count President Trump out, despite what the polls suggest. And the very latest polls in late October and early November show that President Trump is gaining on Biden, and the election will be determined by a few very important swing states where Biden will have to tip the result from a Trump majority in 2016 and back to Democrat control in 2020. The 2020 election is probably the most important US election in generations and the effects and ramifications of it will be felt far outside the countries borders. Let’s look at what type of economic climate the average American Forex and Stock traders may expect under a second Trump term or Biden’s first presidential term.
- Analysis for Forex Trading
- Currency Convertibility
- Forex Arbitrage
- Forex Options Trading
- Forex Trading Signals
- Forex Trading Strategies
- Forex Trading Tools
- Market Hedge Work
- Natural Hedges
- Patterns for Forex Trading
- Position Trading in Forex
- Risk Management in Foreign Exchange
- Scalping in Forex
- Trading at the Forex Market
- US Presidential Election 2020
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Cryptocurrency is a virtual digital currency that uses encryption technology to ensure its security. Cryptocurrency transactions are processed through a decentralized blockchain network. Due to the use of a distributed ledger, it has the advantages of high security, high fault tolerance, openness and transparency, and non-tamperability.
Cryptocurrency miningCryptocurrency mining (mining) is usually interpreted as the process of verifying transactions and adding them to the blockchain public ledger. In short, this type of mining has two benefits, generating new cryptocurrencies and facilitating transaction processing.
RMB VS CryptocurrencyIn terms of currency properties, virtual currency is not essentially currency: lack of national credit support, it is difficult to perform currency functions; the upper limit of the number makes it difficult to adapt to development needs; lack of central adjustment mechanism, price fluctuations are large. However, the speculative nature of virtual currency is also one of the reasons for its widespread popularity. Many investors will choose to hold virtual currency for a long time to invest.
The legality of cryptocurrency transactions in ChinaAs the price of virtual currencies soared in 2017, the influx of a large amount of capital brought more risks to the market. In the same year, the central bank’s announcement pointed out that virtual currency is essentially an illegal financing activity, requiring that the issuance of tokens be stopped on the same day and cleared. At the beginning of 2018, the Central Bank issued a notice requiring all units to strictly prohibit providing virtual currency trading services. In comparison, Hong Kong, Macao and Taiwan have relatively loose policies in this regard and are mainly included in the regulatory system. Although the issuance of tokens or the trading and exchange business between legal tender and virtual currency in the name of an enterprise are illegal; however, personal holding and transaction exchange are legal.
What are the most popular cryptocurrencies in China?
BitcoinReleased in January 2009 The originator of cryptocurrency The maximum number of agreements is 21 million The cryptocurrency with the highest market capitalization and largest trading volume
EthereumReleased in July 2014 The second most valuable cryptocurrency Experts are optimistic about its gains this year
TetherReleased in November 2014 Pegged to the U.S. dollar and can be exchanged 1:1 The bank account has reserves as protection and the price is stable The current market capitalization ranks third
What can cryptocurrency be used for?
In-store paymentAccording to Coinmap statistics, as of June 2020, there are as many as 19,402 offline merchants worldwide that support Bitcoin payments, including restaurants, hotels, and transportation.
Online shopping/exchangeThere are more websites that support virtual currency than people think. Some shopping platforms will also give away virtual currency along with purchases. Virtual currency will also play an important role in the exclusive platform, such as making consumption, exchanging cash or exchanging goods.
Online gambling/bettingCryptocurrency has brought new possibilities for online casinos. Since the blockchain system cannot be controlled by interest groups, people cannot manipulate and tamper with it. Therefore, only cryptocurrency gambling is truly “fair gambling”. The advantages of blockchain currency as a bargaining chip also include anonymity, fast transfer and low handling fees.
Long-term investment/savingsAlthough the total amount of many virtual currencies is constant, as demand increases, various currencies will increase in value. Therefore, holding or saving virtual currencies can also be a stable financial management method. Because they are optimistic about the appreciation of virtual currencies, many people choose to invest through long-term holdings.
The spread of the covid-19, which has become a historic pandemic (a global pandemic). It has been more than half a year since this infection became apparent, but it still has a strong impact on society. Naturally, the world economy has been greatly affected, and the situation is still serious and no vaccines or cures are ready and the instability in financial markets is set to remain for a while. So, let’s look at how this “new normal” has affected the global economy and the stock markets.
Slow reopening of the economiesEurope resuming economic activity and South America and North America with worsening infections First, let’s take a look at the current state of the world economy. The number of people infected with the new coronavirus in European countries has finally been on the decline. In response to this situation, Italy and Spain, which suffered many deaths, have begun preparations for the resumption of the tourism industry, which is a major industry. International flights have already begun in three major cities in Italy. The border blockade has also been lifted. Spain has also announced that it will accept foreign tourists from July 1st.
South AmericaIn contrast to Europe, South America is currently spreading. The situation in Brazil, Peru, and Chile is particularly bad, and among them, Brazil has the second highest cumulative number of infected people in the world, and the increase in infection cannot be stopped. In North America, Canada is beginning to calm down, but in the world’s most infected United States, intensifying demonstrations of discrimination are increasing people-to-people contact. Therefore, it is suggested that the second wave may come in the future. As you can see, the situation in the Americas is still serious, and there is no clear path to normalization of economic activity.
Status of Asian countriesWhat is the status of infection in Asian countries, including Japan, and what is the move toward resuming economic activity? As you know, the number of infected people is decreasing nationwide. We are regaining normal economic activity. In addition, China, which has the largest economy in Asia and was the epicenter of this new corona, seems to have succeeded in suppressing it as a whole according to the announced figures. While many other Asian countries have succeeded in containing the new corona, the number of infected people in India is currently increasing. Since the Indian economy is the sixth largest in the world, if the spread of infection continues as it is, it may have a great impact on the world economy.
Impact of the Covid-19 on the stock marketThis new coronavirus has spread all over the world and has had a great impact on the world economy. That meant that it had a huge impact on the global stock market, and the actual plunge in the stock market due to the impact of the new Corona in mid-March was comparable to Black Monday and the Lehman shock. However, as in the past crash, the stock market rebounded after the crash. The world’s major stock markets, such as the Dow Jones Industrial Average and the Nikkei Stock Average, are now returning to levels around February before the plunge. However, since the current stock price is divergent from the real economy, many experts think that it is a “corona bubble,” and the situation continues to be alert. It is rebounding a bit in May, and this could show that the situation is stabilising. In addition, the once calm VIX index is rapidly increasing again. This means that investors’ fears remain deep-rooted, suggesting that a small negative factor could cause the stock price to fluctuate significantly. Therefore, the nervous market will continue worldwide for a while.
Asian stock marketToday, stock markets around the world are hypersensitive to negative factors, and so is the Asian market. The Nikkei Asia 300 Index, which is an indicator of the Asian economy as a whole, once showed an upward trend, but in response to the US stock market that plunged due to concerns about the second wave of the new corona, it has continued to decline in June. I will. In addition, neither Japan nor China, which should drive the Asian economy, are doing well. Japan has been disappointed with the government’s economic measures, and China has problems with secondary infections and Hong Kong, which has failed to give investors a sense of security.
About the exchange rateFinally, let’s touch on the exchange rate. The exchange rate has fluctuated sharply since the latter half of February, but it is now seemingly calm. However, the uncertainties in the future have not been resolved, and the situation will change significantly depending on the following factors:
- New corona second wave
- Crude oil price
- Timing of rising interest rates
The decision to enter a substantial financial market like Forex is indeed a noble and accurate choice. It is the world’s largest financial market, and one can proudly be associated with the same. But before you go ahead into this market, you need to realise a bunch of aspects. The market did not turn out to be so huge without considerable elements coming into the picture. Since these aspects are present, it would not be advisable to step in without taking the right form of measures. When these points come after thorough and advanced analysis, you can be assured of strong results. Hence, to shed more light on the same, here’s the essential guide that you need for Forex Trading.
StrategiesThe need of the hour cannot be formulated into a specific term known as “strategies”. Yes, they are essential aspects that will curb your approach towards the market and help you head in the right direction. So to help you out, here are a bunch of strategies.
1. Hedging ForexThis is a unique strategy or method that helps to reduce the risk by taking both sides into consideration. It is known to be an easy way that can promote you to initiate a long and short position on the same pair. For this purpose, the kind of pairs that you choose also need to be looked into. Individual advanced traders tend to use different pairs to make the hedge, ultimately leading everything towards a complicated position. By all means, the best pair for this purpose would be anything involving the US Dollar.
2. ScalpingScalping is another process that utilises short-term trades to earn a bunch of pips. It is majorly carried forward with a news release and other supportive technical conditions. This particular form of trade can either last for seconds or a few hours. Although it is a risky process, it manages to bring you favourable returns. One should only make an approach towards Scalping by keeping in mind their overall trading position.
3. Position TradingPosition trading is a strategy that does not share any form of similarity between Scalping. In other words, it tends to be associated with the long term aspects of trading and can last for months or years. Since positions are held for quite some time, only a patient trader can make matters meet with this strategy. Huge swings can also come your way, pushing you to leave everything aside. But an analytical approach can help you out.
Currency PairsUnderstanding the details and aspects of some major currency pairs is another move that is going to benefit you. So without further ado, here are few of the major pairs.
1. EUR/USDThis particular combination is a trader’s classic choice, and they all tend to hold on to the same. Since both these pairs also bring in a bankable economy, matters tend to gain a better form of clarity. With the Euro being the base and Dollar being the quoted currency, traders move ahead with this pair.
2. AUD/USDThe Australian Dollar and the American Dollar is an interesting pair that you can depend on. Rates and aspects tend to reach a higher note as the Australian economy has shown positive signs. The US/China trade war does not come into the picture since Australia and China are trading partners. So whenever a trade gets through, or the relationship becomes more substantial, you can expect something good to arise from this pair.
3. USD/CHFYes, that’s right. The American Dollar and the Swiss Franc tend to form a considerable form of value. This particular combination manages to bring out benefits since the Swiss economy is something that you can depend upon. Throughout the past, it has shown different signs of financial dependency and thus, merging it with the Dollar makes absolute and complete sense. The lower risk pattern, which is visible throughout Switzerland’s markets is another sign indicating this pairing to be successful.
Recent ImpactsThe Forex market tends to be affected by certain situations and decisions that have risen to global standards. So as a move to trade accurately, we need to take a look at these impacts and understand their implications.
1. BrexitBrexit is far from being over, and its impact can be felt even today. The decision brought forward a sense of uncertainty and traders are left to make drastic choices.
2. CoronavirusOne of the biggest pandemics to affect humanity in recent times has to be Coronavirus. Apart from everyday life, the virus has also taken a toll on global markets and thus, has arrived at Forex trading. Currency pairs like USD/JPY and EUR/USD surged to lower points, making investors all the more anxious. The only outcome for the same would be to wait and watch.
The importance of trading tools is a topic that we are all aware of. Different kinds of insights and market analysis tend to be efficient when you bring in some trading tools. Their requirement rate goes up as you enter markets like Forex. Trading currencies need a little touch of perfection, and these tools are the ideal ones that you need to tag along. But when you move forward to learn more about these tools, you will realise that they are everywhere. There is an abundance of these tools in the market, making it hard for people to differentiate between the good ones and the bad ones. So to help you out, here are some of the best Forex Trading tools.
1. MetaTrader 4 MetaTrader 5These platforms include a vast set of tools that stand to define variety and effectiveness. Real-time trading combined with user-friendly approaches has set sail to create one of the most efficient tools out in the market. The aspect of technical analysis is another concept that makes matters all the more interesting. With this tool in hand, you can be assured of getting the right assistance that comes with a customizable interface.
2. Correlation MatrixThe change of exchange rates in one currency pair when compared to another pair is known as correlation. A set of these currency pair correlations make up a Correlation Matrix. The aspect that you need to understand in this manner is the behaviour of these currency pairs. Some of these pairs correlate strongly as they tend to have a common base current. Since most of them may or may not behave in this fashion, reviewing them will help you in so many ways. It will help you avoid establishing offsetting positions and make matters fruitful. Hence, a tool of this calibre provides the right support.
3. Trade JournalAt times, traders usually tend to forget to keep records of their trade. This moves ahead to bring in various kinds of errors in the future. So the best and the only solution is to keep a record of the same along with an explanation and signals of why and how it was initiated. For this purpose, Trade Journal comes into the picture and helps you examine mistakes, thereby preventing you from repeating the same. A paper journal, spreadsheet or even a trade journal will help you do the trick.
4. Time Zone ConverterThe difference that time zones bring in for the trade is not something too light to be ignored. Leading Forex trading centres tend to overlap sessions during specific periods of the day. These overlaps are the most liquid markets for particular currency pairs. For this purpose, it is quite essential to know what trading sessions are open and what times are the best for trading. Taking into consideration aspects like volatility, liquidity and trading volume, you can make the most out of the same. Thus, a tool like Time Zone Converter holds prime importance.
The guide to surviving in the Forex market tends to include a unique concept that has brought forward numerous benefits. Known as an advanced strategy, this particular concept has made investors happy by helping them tackle down a long list of problems. To avoid all the guessing work since it is clearly mentioned above, let’s cut to the topic and talk about Scalping in Forex. The advanced set of strategies that it brings to the table is required to help run aspects through the market and make you wealthy. Hence, let’s learn more about this advanced concept known as Scalping.
Choosing is a broker for your scalping strategy is another step that you need to execute. For this purpose, you must cross out brokers who do no allow the process to take place within the system. According to the current market stats, numerous brokers are not supportive of the idea of closing trades. As a result, these brokers do not provide ECN execution systems and other tools that promote the strategy. Considering all these features, your list of brokers needs to get shorter until you find one that suits all your needs. Towards the end, when the factor of costs arrives, we believe that you would have made a decision.
The IntroductionIn simple terms, Scalping is nothing but a strategy that works based on real-time technical analysis. When it gets mixed with Forex, the method moves ahead to make a large number of trades to produce small amounts of profits. This is achieved as the process does not hold a position for a long time. It tries to gain pips by holding a position for a couple of hours, days or weeks. Anything beyond that is not considered to be Scalping.
The ProcessThe practical application of Scalping for Forex tends to take place as traders scalp currency pairs by using a specific time frame. These periods last between 1-15 minutes. But the traders do not usually opt for the 15-minute time frame as they believe it to be less effective. As a result, the 1-minute and 5-minute time frames are the most common choices. These are known to bring out a profit of 5 and 10 pips per trade, respectively. But for this to scale through, you also need to pick a currency pair that is volatile and predictable.
The DecisionThe decision to opt for Scalping is one that needs to be taken after some consultation. Soon after you understand the method, you need to think about the time that you’re willing to put into the trade because Scalping requires timings that can be related to a full-time job. Yes, that’s right. Constant analysis, placements and multiple orders tend to take hours, and at times they might even be stressful. Your predictions of the market is another aspect that is deemed to be necessary. Based on your analysis, you must quickly open and close positions that should not take more than a few seconds.
Foreign exchange risk, for those who are not really aware of what it means, can be referred to the losses incurred by an international monetary transaction owing to certain fluctuations in currency. Foreign exchange risk (FX risk), which is otherwise also known as currency risk, describes that the value of an investment might depreciate due to any change that might be observed in the relative value of the currencies involved in the transaction. This is, in a nutshell, the essence of foreign exchange. However, it would be puerile to restrict the domain to just the definition and provide no further insight into the topic at hand. Though, the entirety of foreign exchange might not be possible to wade through within the span of one article, there are a few essential points that you must understand to be able to understand the topic better.
An Insight into Foreign Exchange Risk:As we have already stated at the beginning of the article, foreign exchange risk refers to the risk associated when there are significant losses incurred by an international financial transaction due to fluctuations in the currencies involved. Any kind of appreciation or depreciation in the base currency or the denominated currency will have an impact on the entire system of cash flow arising as a result of the transaction. The domain of foreign exchange affects several investors and business people who have to deal with international transactions on a daily basis. Therefore, understanding the inherent risks of foreign exchange is all the more important to these people, without which they could end up in a soup.
A Few Foreign Exchange Risk Management Techniques:Now that we have spoken about what a foreign exchange risk is, it is time to look into a few techniques in which these risks could be managed.
Risk Sharing-Just as the term suggests, the parties involved in the transaction (for instance, the seller and the buyer), agree to share the burden of the risk associated with the transaction so that their relationship is not affected and depends solely upon the quality of the product and the reliability of the supplier.
Payments Netting-This method proves to be beneficial to the companies that are exposed to transactions involving multiple currencies. The technique allows the companies to control the way the payments are dealt with since all the payments are netted to a singular transaction.
Natural Hedging-This method of foreign exchange risk management offers the firm quite some protection from the fluctuations in exchange rates because the relationship between the revenues and costs of a foreign subsidiary body furnishes a natural hedge.
Conclusion:The right implementation of one or more than one techniques can shave down the risk associated with the foreign exchange transaction and help a firm thrive. It is always crucial that you remember that transactions that involve foreign currencies have risks associated with them. But that does not mean that you have to give in the risks and suffer from the losses. You can always use the techniques mentioned above to hedge the risk and make a favourable transaction.
Forex options trading is an important branch that many seem to be ignoring. The basic meaning and what it moves ahead to prove are essentials that traders need to be aware of. Be it the strategies or the methods that it proposes; everything tends to have a unique connection to the market and thus, it manages to be effective. So the question of utilization should not come up, and everyone needs to make an effort to try the same. Since that may not be possible without venturing further into Forex Options Trading, we are here to help you out. Hence, here’s all that you need to know about Forex Options Trading.
1. What is it?Forex options are nothing but a bunch of derivatives that are based on specific currency pairs. Trading the same brings in a set of strategies that are immune to the Forex market. So the option to choose a particular strategy can be answered after looking into the type broker, the platform and the option that a trader selects. Once all these aspects align together, you will have a strategy. Since the market is a decentralized one, these options tend to vary in nature and character. They move forward to be unique and can be differentiated from the ones that are chosen for the stock market.
2. What you need to RememberDue to the path within which these strategies move, certain things stand to be necessary. If you’re an investor planning on choosing Forex Options trading, then here is a list of points that you need to be aware of.
- Lacks Obligation – the options that you’re about to choose will not be having an obligation to deliver a physical asset. This is a common ingredient for Forex Options trading and investors usually amend their ways before opting for the same.
- Two Main Varieties – the Forex options tend to come in two main varieties, and there is nothing more to the same. These are known as Vanilla Options and SPOT Options. So the decision lies in your hands.
- Differentiates – as you move from one product to another, you will also realize that these options vary based on the entity that they are offering.
3. What are the types of Forex Options Trading?The two types of options commonly available for retail Forex traders tend to be currency options trading. They mainly involve short-term trades of a currency pair that aims at future interest rates of the same pair. So, let’s look into these types.
- Vanilla Option – the Vanilla option also goes by the name of options contract and is considered to be the traditional call. With this option in hand, traders have the right to buy or sell currency at the agreed-upon terms and conditions but are not obliged to do so. These so-called terms and conditions include price and the date of execution. The basic process occurs when the buyer states how much they want to purchase and the price at which they wish to purchase, along with the date of expiration. On the other hand, the seller responds with a quoted premium. The date of explorations tends to revolve around European or American style options.
- Spot Option – SPOT stands for Single Payment Options Trading and is known as the flexible option out of the two. Digital and Binary options are few of the other names that used to describe this option. The process takes place when the buyer offers a scenario stating that a specific currency pair will break at a particular point within a set of days. Based on the probability of the same, they will receive premium quotes. If the so-called event takes place, then the buyer will earn a profit, and if it doesn’t, then they will lose the premium that they paid. These contracts cannot use premiums from traditional options since they need to be higher. After they reach a certain point, other points or if it does not reach at all, they will be written to payout. Since specialized options come into the picture, premium requirements tend to be higher when compared to the rest.
Trading could be superficial or intricate, depending on the perspective you like to take on the field. Forex is one such domain which is layered and is to be explored for its potentials. When you want to take the backseat and relax on the journey of forex trading, there isn’t much chance for you to get to the point of complexity. But as you take the driver’s seat with all the directions posing a challenge to ride through, forex trading will start to appear complicated. On the surface, like any other concept, forex trading is also simple; delving deeper will equip you with perpetuating data about forex trading. The marketplace that has been made for the trading of currencies is the right platform for traders to make speculations of the profit and conduct well-composed commerce. Forex trading is widely popular as the largest exchange in the world and is, therefore, used by thousands of brokers, individual traders, banks, and other investors. Forex trading is most often conceptualized as the field for indulging in a currency trade with nothing more than picking the direction of a currency pair to be focused on by the trader. The facts are contradictory to the world’s conception of forex, which calls for experience and patience to invest considerable time in the trade. Technical and fundamental analysis of the trading business has to be done on subtlest of levels. Also, you need to have an in-depth understanding of the market and the factors that affect its conditions. You can only find forex trading systems on the Internet that are virtually supportive, the remaining of which you need to fill with your efforts. Of all the information related to forex trading, it is position trading that we will have a closer look at. Position trading is one kind of trading in forex, which has to be learned by every trader who is planning on going deeper into the business.
Daily and weekly charts will consist of resistance levels and key support which hold significant value in position trading. The professional traders most prominently focus the higher time frame charts for analysis.
Position TradingAlthough position trading is referred to as a type of forex trading, it is, in fact, an investing style that has speculative traits to it. This pattern is most followed by the traders when they take an interest in the long-term trends and prices in the market. Position trading has its own set of characteristics with the traders preferring only a handful of major positions. Nevertheless, they can go for any of these positions all through the year for active trading. When you are a position trader, and this style is your forte, you surely will have reasons to stick to it. One such reason for almost all traders would be the opportunities they receive which last for a few months or even for more than a year. Fundamentals of the trade have to be learnt properly before stepping into position trading since its life of more than just a few months. What every position trader has to be conversant with is the art of smoothly falling into that place when the opportunity within the market strikes and coming out of it as that period ends. It isn’t the elegant virtues you possess that matters the most here; technical knowledge about the timing models that need to be followed plays a key role.
Who is a Position Trader?A position trader is one who indulges in forex trading with appropriate multi-year or multi-month trend evaluations as compared to the current situation or emergence. They do not act like that of the swing traders who look for active day investments and trends to trade. Position traders like to take the seat for a long time without having to adopt new trading steps every passing day. Previous trends show that most of the inexperienced retail traders go for the short-term day trading option, while the professional Commodity Trading Advisors and Hedge funds incline towards position trading.
Necessary Tools for Position Trading in ForexSince technical analysis is suitable for timing a long-term trade, it would appear to be the most important in position trading. In contrast, the price action analysis stands as a reliable one for long-term charts. Such analyses are essential in getting to successful trading times, for which, tools are required to notify you with the right opportunities. Here are some of those necessary tools for position trading.
Trend Line IndicatorThis is said to be one of the most effective tools in picking the right opportunity since it offers a proper insight into the trading market. With the price action and trends being more apparent on the longer time frame charts, position trading becomes more profitable. The trend line indicator helps by giving a clear directional bias on the market trends and highly prevalent price action.
Support and ResistanceAs mentioned earlier, resistance levels and horizontal support play principal roles in position trading. A higher resistance level is likely to come into action when a major resistance or support is broken on the chart by the price action. This rise happens when there is an upside break, whereas when a downside break occurs, the resistance level is likely to decline. When the break doesn’t take place, and the price action falls into the opposite direction, you have to either consider it as a price rejection or be alert for an impending trend in the opposite direction.
Moving Average IndicatorsWhat matters the most while using the Moving Average Indicator is the longer term’s number of periods that you utilize. The moving averages most often will have a longer-term price action in the 50 and 200-period zones, while you also have to pay equal attention to the 100 and 500 periods moving average.
Most Important Economic IndicatorsPosition traders will also have to keep a tab on the economic trends, which necessitates a few indicators. While analyzing the macro-economic data for long-term position trading, look out for the indicators such as inflation rates, interest rates, trade balance, and economic and political stability.
As the name suggests, currency convertibility is all about the ease with which the currency of a country can be converted to other valuables like another currency or gold. This concept has had a significant role in the life of the world economy; it indeed is a key aspect of the seamless functioning of international commerce. All goods that are sourced globally undergo all stages of trade upon a mutual agreement to be paid in a currency that is not the buyer’s domestic currency. A currency’s value can be determined from the convertibility it possesses. With poor currency convertibility, the chances for it to have a high storage value or get swapped for other currencies are quite low. Such currencies with a low value for convertibility will pose a huge risk to the domestic market and economy within those countries owing to the disinterest the other countries express in trading for the domestic currency. World trade has one of its pillars set on currency convertibility since it is the factor that leads to exponential growth in the capital flow between countries. The need for currency convertibility was felt at a point where the world economy was seemingly in a precarious state without supporting the standard living conditions through essential trading. The use of foreign exchange was regulated by many countries to maintain a decent exchange rate for their currencies.
A Closer Look at Currency ConvertibilityIn the simplest terms, currency convertibility is the value for free conversion of a country’s currency into the foreign exchange at market rate as determined by the demand and supply. When you have foreign currency (Euros, Pound Sterling) with you and want it converted, currency convertibility comes into play. You can get it converted it into your domestic currency at the exchange rate that has been determined by the market. Authorized dealers such as banks provide proper conversion rate data based on which you can get the money exchanged for your domestic currency or vice-versa. Only on the capital and current accounts for import and export of invisible and merchandise is the currency convertible. In capital account convertibility, the flows of portfolio capital, direct investment, dividends and their interest, and borrowed funds are easily convertible into the foreign exchange at the fixed exchange rate. In less complex terms, capital account convertibility can be defined as the ease with which foreign investors can access industries in your country through the domestic stock markets by converting their money into the domestic currency even without the government’s permission. Stability of currency is imperative for the capital account convertibility to function flawlessly. An impeccable performance of the concept within the market cannot be expected of always since the volatility could set in anytime. Therefore, the convertibility over capital is considered to be quite risky, making it valid only after the introduction of current account convertibility which will also entail the stability of currency and control of the deficit in the balance of payments.
How Will Currency Convertibility Benefit You?
- The potential for high profits makes export an indispensable part in the market. For the same reason, currency convertibility promotes the business of exporting, consequently adding to its profitability. This rise in profit occurs due to the increase in the exchange rate from the previous market fixed exchange rate. Products that have a lower intensity of import are highly promoted by currency convertibility for exports.
- Import substitution is encouraged more when the imports fall with rising expenses due to currency convertibility. This situation is caused when the market-determined exchange overtakes the value of the previous fixed exchange rate.
- Currency convertibility also provides incentives to the remittances of foreign exchange by the non-resident citizens and ones living abroad. This step reduces gold smuggling and the inflow of illegal currency formats into the country.
- Deficit balance of payments caused by over-valued exchange rates can lead to depreciation of the country’s currency, which in turn will boost the exports. These can be achieved by reducing the imports and raising their prices and also taking down the prices of export. The deficit gets corrected in the process without much of an intervention by the Central Bank.
- Prices of goods and in a country will also affect the purchasing power of a currency, which will be further influenced by the currency convertibility. Currency convertibility will, therefore, make sure that the various trading countries have their specific production patterns and international trade ensured through comparative advantage.
- Since currency convertibility boosts the capital flow and trade between countries, the chances for the world economy to fall are reduced, and a firm ground is held onto as the value of currency maintains consistency. Hence, it can be concluded that globalization has its strongest roots in currency convertibility.