By M. Osman Ghani
The liberal economic and investment policies introduced since early 1990’s, put great emphasis on the private sector, making it the engine of growth. To facilitate increasing participation of the private sector and domestic and foreign investors, Pakistan introduced a long list of incentives and attractive packages to ensure accelerated GDP growth, income and employment generation.
Pakistan’s manufacturing sector recorded high growth rate during 2001-07 (average 9.6 per cent). Fiscal year 2003-04 and 2004-05 recorded highest ever manufacturing growth rates in the last three decades at 14.0 and 15.5 per cent respectively. Private investment as share of GDP which was 7.5 per cent in the 1990’s compared to 16.6 per cent of the public investment, increased to 15.7 per cent of GDP in 2005-06. However, since 2006-07 overall private sector’s share in the total investment has been declining, which stood at 14.2 per cent of GDP in 2007-08. Due to a number of adverse factors both domestic and international, Pakistan’s manufacturing sector recorded one of the weakest growths in a decade in 2007-08.
In the first eight months of the current fiscal, year large scale manufacturing has, in fact, contracted by 5.7 per cent as compared to a positive growth of 5.3 per cent during the same period last year.
Major sectors recording negative growth in the current fiscal year are; textile (-0.4 per cent), food and beverage (-06.7), petroleum products (-08.4), and automobile (-38.2). The main contributors to the negative growth among others are: global slump, domestic slowdown in demands and productions, growing power shortages, high interest rate, high inflation and rising cost of doing business etc. In view of the toughest ever time facing the business community in Pakistan they are now demanding for a better investment environment including reduction of cost in doing business.
High interest rates as a result of high discount rate (14 per cent at present) are eroding competitiveness and capability of the business community. Pakistani businessmen are rapidly loosing ground to many regional countries like India and Bangladesh in international trade. To revive their competitiveness and regain their lost grounds in international and domestic markets the business community demand drastic cut in the interest rates. The farmers are also demanding drastic cut in the lending rates to enable the agriculture sector to achieve more productive capacity and become dynamic. (See Table)
Terming the recent cut in discount rate from 15 to 14 per cent by the State Bank of Pakistan (SBP) as inadequate, various chambers of commerce and industry in Pakistan have demanded of the government to bring the rate to the minimum possible level for revival of the country’s economy. Business community was expecting the discount rate to be brought down to single digit level.
However, just one-per cent reduction in it has dashed all hopes of the business community for good times to come. This was also the unanimous opinion of local business community of the federal capital area.
The Multan Chamber of Commerce and Industry (MCCI) welcomed the State Bank of Pakistan’s decision to cut interest rates from 15 to 14 per cent but demanded further reduction in this regard. Representatives of trade and industry have generally appreciated the policy measures announced by Governor, SBP. Chairman, ruling business group, while appreciating positive steps of SBP with regard to 100 per cent Export Refinance Schemes, they term high discount rate as detrimental to the promotion of investment and business activities.
The representative of the Geneva based International Labour Organisation (ILO) for Policy Integration, has warned that reduction in annual GDP growth rate from six per cent to three per cent and higher bank interest rates would cause more unemployment and discourage investment in industry and agriculture sectors in Pakistan.
The ongoing electricity and gas load shedding has seriously affected the local industries and export, forcing lay off of millions of workers and closure of thousands of industrial units in the country. He called upon the government to take immediate measures for overcoming the energy crisis and for uninterrupted running of the industrial units. If the government does not overcome the load shedding of electricity and gas, and does not adopt policies to control unemployment, then there could be devastating social unrest in the country.
Due to global recession, almost all developed and emerging countries are slashing interest rates to revive their sagging economies and are offering many stimulation packages. SBP still maintains high interest rate which put a crippling effect on industry.
The interest rates, all over the world, are showing a declining trend. For example, in the United Kingdom, the interest rate has recently been reduced by 0.5 per cent. In India, discount rate has been reduced to 4.75 per cent, in Bangladesh it is 5 per cent, in Thailand it is 4.25 per cent and in Malaysia it is 3.5 per cent (Table). In Pakistan, the discount rate at 14 per cent is the highest in the region. Banks in Pakistan are charging a little less than 20 per cent that is perhaps the highest mark-up rate in Asia. A weak private sector cannot remain competitive and dynamic with such high interest rate burden. Better growth of trade and industry would not only provide strong cushion to the economy, but would also create plenty of job opportunities contributing significantly in reducing the unemployment and poverty levels in the country. Therefore, the business community wants SBP to bring down interest rate to single-digit level so that accelerated economic activities could be promoted to give a big boost to GDP growth, income and employment generation by availing easy credit.
Computer industry in Pakistan in particular, is reportedly on the verge of collapse as the growth of the industry has alarmingly declined. The industry is still at nascent stage and the imposition of high general sales tax has resulted in sharp increase in the prices of PC and other equipment’s common users. The high interest rate is also affecting their business. The computer Industry therefore, wants reduction in both sales tax and high interest rate to reduce its hardship.
High lending rates and business slump have caused record slowdown in the flow of credit to the private sector in the current fiscal year.
During July – 18th April FY 09 bank credit to the private sector has increased by only Rs.55.4 billion compared to Rs.359.7 billion in the same period last year. Reduction in interest rate, inflation and other costs of doing business along with improvement in law and order situation could help to bailout a depressed private sector in Pakistan.
INTEREST RATES IN THE REGIONAL COUNTRIES
Country Period Discount rate Deposit rate Lending rate
Bangladesh Sept. 2008 5.00 10.21 16.32
Pakistan Feb. 2009 14.00 6.96* 14.82*
India April, 2009 4.75 - 13.25
Malaysia Sept. 2008 3.50 4.14 05.96
Thailand Oct. 2008 4.25 2.75 07.25
* Weighted average rates.
__________________________________________________________
Sectors Amount Percentage
Infrastructure development Rs166 billion 45
Social sector Rs188 billion 51
__________________________________________________________
Again, the social sector suffered a major cut as out of Rs100 billion cut in development spending Rs79.5 billion was slashed from social sector projects, while the education sector Rs20 billion and health Rs39.7 billion would be decreased for next year. Recently, Pakistan occupies the 136th position among 177 countries listed in the human development index and lags behind even Bhutan and the Maldives in South Asia.
Remedial approach
(a) The government should launch a massive effort for job creation and employment generation in order to reduce the high levels of poverty.
(b) Infrastructure development would be an effective tool to curb the rising ratios of poverty. It should be a country-wide strategy, on the other hand, small and mega projects of infrastructure development should be initiated at the earliest.
(c) Housing is another sector which needs to be promoted and encouraged through a well planned incentives package. Huge housing will not only give a boost to all related industries but will go a long way to meet the acute housing shortage in the country.
(d) The transportation sector should also be reactivated. Different public welfare schemes should be started at gross-rout levels.
(e) Small and extensive vendor units in the textile, engineering and other export-oriented industries should be settled.
(f) Easy and smooth loaning facility.
(g) Effective use of micro-credit institutions to reduce the high levels of poverty.
(h) Delivery of essential services and basic necessities of life would lessen the burden of poverty on the general masses.
(i) The restoration in the investor’s confidence is a must because investment would automatically create more jobs, reduce poverty levels and promote economic growth.
(j) Better law and order situation would be helpful in the restoration of business activities and to reduce rising poverty.
Concluding remarks
Poverty discourages human talent and dignity. It decreases the level of patience and tolerance, and promotes corruption and terrorism and it also gives ways to disintegration and social alienation in the society. Therefore, sincere and coordinated efforts should be started to reduce the high ratios of poverty.
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Sunday, September 20, 2009
Borrowing spree and economic recovery
One of the main concerns about economic recovery is rehabilitating large-scale manufactoring that has shown a negative growth of 6.0 per cent. It is causing multiple losses to the economy: higher trade deficits, low exports and increase in unemployment
By M. Sharif
One of the main national concerns, now a day, is about economic recovery in the midst of a quite challenging fiscal, monetary and security environment. Managers of national economy since past a few months have been on borrowing spree from internal and external resources to stabilise economy in accordance with the bench marks mutually agreed between them and IMF officials. They had the compulsion of doing so to avoid sovereign default and bridge fiscal gap. Macroeconomic stability achieved thus far, despite being in the right direction, is not robust enough to make economy self-reliant and self-sustainable within stipulated timeframe of around two years.
Analysts and ministry of finance in Economic Review, July to March, are of the view that economy is yet to come out of troubled waters. It is likely to take more time and effort to implement structural and other changes to make economy macro-economically stable, self-reliant and achieve sustainable economic growth. One of the key concerns is about high cost of debt servicing that would have quantum increase in next fiscal budget. Would economic growth and capacity to pay back the debt be compatible with the total debt liabilities (TDL) and development needs during the next few years or once again the country would slip into debt trap?
Borrowing spree: justification and risks
According to SBP Annual Report and Economic Survey 2008, TDL remained steady between years 2001-07. The situation reversed during FY 2008 and thereafter it has been getting precarious. By the end of last fiscal year, TDL stood at 57.4 per cent of GDP with domestic debt component of 31.2 per cent and external debt component of 26.2 per cent. Interest payments amounted to 4.7 per cent of GDP during last fiscal year and were 32.6 per cent of total revenue excluding grants and 26.3 per cent of current expenditure according to finance ministry. A senior finance ministry official is reported to have said, “the government borrowed a whopping Rs1231 billion from internal and external sources during first half of current fiscal year,” to meet its fiscal needs. The government had to borrow Rs483 billion during first eight months that has pushed total domestic debt to Rs3.75 trillion. The major concern is that these figures are likely to soar further in the next fiscal budget. The situation of external debt is no better than domestic debt.
According to SBP AR, 08 external debt liabilities (EDL) that stood 51.7 per cent of GDP by June 2000 declined to 28.1 per cent by June 2007. It further declined to 26.9 per cent by end March 2008. Foreign debt grew at compound average rate 1.2 per cent between FY2001-07, at far less rate than growth in nominal GDP. In absolute terms, it increased from $37.2 billion to $40.5 billion during six financial years but grew at unprecedented pace of 13.3 per cent between July 2007 and March 08, from $40.5 billion to $45.9 billion. Major stakeholders in EDL are Paris Club (36.3 per cent), multilateral institutions (53.7 per cent) and IMF.
A number of factors such as deceleration of non-debt inflows, weakening of USD with respect to other international currencies like euro, SDR and yen, borrowing for earthquake affectees and deterioration in balance of payments contributed to surge in EDL that, in fact, had started soon after FY2005. According to latest estimate, “external debt could grow by around $7.25 billion that is likely to raise the external debt stock to around $52.5 billion by end of current fiscal year, around 31.0 per cent of projected GDP for current fiscal year. It would be higher than 27.6 per cent ($46.3 billion) for last fiscal year.
Economy has been supported during current fiscal year by FDI that fetched more than $3.0 billion despite financial liquidity crunch in international financial market and global economic recession and remittances by expatriates that are likely to be around $6.0 billion by the end of current fiscal year. Despite these positive developments the economy remains highly dependent on foreign loans and grants to address its external account. There are two viewpoints about it. First, external debt is within acceptable limit of GDP and hence it should not be a point to worry. It is also asserted in the same context that the government has no other option except to contract foreign debt to meet it foreign, fiscal and economic development needs. The other viewpoint is that indiscrete external borrowing could lead to a situation where new external borrowing might become essential to pay back old foreign debt.
Pakistan’s EDL are closely monitored by the IMF. According to its estimate, they are to increase to around 31.6 per cent of GDP by the end of FY09-10 and to 32.5 per cent by the end of FY 10-11becasue of substantial financing from multilateral institutions. The debt servicing will increase from 15.0 per cent of export of goods and services to 20.0 per cent during the same period. IMF makes conscious of the fact that, “relatively benign outlook is subject to serious downside risks. They include risks from higher non-interest current account deficit, lower growth, higher depreciation, higher interest rates, as well as lower FDI flows.” These observations are significant and need to be noted in the context of on going economic recovery.
Economic recovery challenge
Economic recovery challenge needs to be viewed in three different contexts of achieving macroeconomic stability, sustainable economic growth and finally the capacity to pay back TDL and EDL. Current global economic recession, security environment and development strategies to be implemented during next 3-4 years are quite relevant in this respect. According to the Ministry of Finance report, ‘ Review of the Economic Situation (July-March 2008-09)’, the economy is getting back to its original confidence after implementing measures according to $7.6 billion economic stabilisation programme that started from November,08. According to the report, “improvement in economic variables such as fiscal deficit, FX reserves build up, import compression and net zero borrowing from the SBP by end of April is quite visible.” This viewpoint has also been endorsed by the IMF although it wants to see much more improvement in many areas of the economy.
Prices of commercial commodities like oil and food commodities have relented substantially from mid-2008 during current fiscal year. It has eased pressure on the economy and helped achieving macroeconomic stability. Fiscal deficit during first ten months (July-April) is registered at 3.1 per cent of GDP and is likely to be lower than the limit of 4.2 per cent set by the IMF. It has not been reduced by generating more revenue but by drastically reducing development expenditure and by implementing few structural reforms such as removing subsidies on energy and increasing support price of cash crops mainly wheat. According to MoF, trade deficit is geared to be 4.3 per cent of GDP and current account deficit is likely to be around 5.9 per cent of GDP by end of current fiscal year. FX reserves with the SBP of Pakistan have increased mostly on borrowed money from paltry low $3.5 billion in October 2008 to $7.8 billion by around mid-April, 09
Agriculture sector is set to achieve growth target of 3.3 per cent thanks to bumper wheat crop. The latest estimate of 14 districts of the Punjab province show a surge of 30.0 per cent in wheat production and even if production in other provinces remains unchanged, overall wheat production may rise to 25.7 metric tons, well above the target. Cotton and rice have also registered positive growth of 7.3 per cent and 13.5 per cent respectively. Livestock sub-sector is also likely to achieve growth target of 3.2 per cent. Agriculture sector growth would augment over all growth of economy.
There are certain areas of the economy that have been influenced by domestic security, political and energy crisis and international recession. Export target and tax revenue collection targets are unlikely to be met. FBR collected Rs898 billion during July-April and it is unlikely to collect slightly more than Rs400 billion during last fiscal quarter to meet Rs1.3 trillion targets. Notwithstanding the positive trends in economy, high inflation, negative performance of LSM and high cost of debt servicing remain some of the weak areas of the economy.
Food and over all inflation have proved quite stubborn even by IMF standards that wanted the latter to be reduced to 12.0 per cent by end of current fiscal year. MoF Review gives a candid state of inflation. Food inflation during July-March period of the fiscal year was recorded 28.0 per cent against 13.8 per cent during corresponding period of last fiscal year. High food inflation is attributable to, “the stubbornness of the prices of some key commodities such as edible oil, pulses, rice, milk, sugar, poultry, meat, wheat, wheat flour and fresh vegetables.” Non-food inflation was recorded 19.2 per cent against 6.3 per cent during corresponding period of last fiscal year. It has remained persistently between 18-20 per cent through out the current fiscal year and is likely to stay at this level by end of current fiscal year. Keeping in view the current inflationary pressure, it is difficult to share the optimism of financial advisor the PM that inflation would be reined in to 6.0 per cent by end of next fiscal year.
One of the main concerns about economic recovery is rehabilitating LSM that has shown a negative growth of 6.0 per cent. It is causing multiple losses to economy such as comparatively higher trade deficit, low exports and increase in unemployment. Notwithstanding security concerns and global recession that have certainly negatively affected LSM, energy crisis and high interest rates on commercial borrowings have also negatively affected it. Economy is to register a growth of around 2.5 per cent.
Conclusion
The real issue is about sustaining macroeconomic stability for real economic recovery. It won’t be possible unless inflation is reduced considerably; LSM growth recovers, tax revenue collection increases according to potential of economy and dependence on foreign credit is reduced to bare minimum.
--------------------------------------------------------------------------------
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By M. Sharif
One of the main national concerns, now a day, is about economic recovery in the midst of a quite challenging fiscal, monetary and security environment. Managers of national economy since past a few months have been on borrowing spree from internal and external resources to stabilise economy in accordance with the bench marks mutually agreed between them and IMF officials. They had the compulsion of doing so to avoid sovereign default and bridge fiscal gap. Macroeconomic stability achieved thus far, despite being in the right direction, is not robust enough to make economy self-reliant and self-sustainable within stipulated timeframe of around two years.
Analysts and ministry of finance in Economic Review, July to March, are of the view that economy is yet to come out of troubled waters. It is likely to take more time and effort to implement structural and other changes to make economy macro-economically stable, self-reliant and achieve sustainable economic growth. One of the key concerns is about high cost of debt servicing that would have quantum increase in next fiscal budget. Would economic growth and capacity to pay back the debt be compatible with the total debt liabilities (TDL) and development needs during the next few years or once again the country would slip into debt trap?
Borrowing spree: justification and risks
According to SBP Annual Report and Economic Survey 2008, TDL remained steady between years 2001-07. The situation reversed during FY 2008 and thereafter it has been getting precarious. By the end of last fiscal year, TDL stood at 57.4 per cent of GDP with domestic debt component of 31.2 per cent and external debt component of 26.2 per cent. Interest payments amounted to 4.7 per cent of GDP during last fiscal year and were 32.6 per cent of total revenue excluding grants and 26.3 per cent of current expenditure according to finance ministry. A senior finance ministry official is reported to have said, “the government borrowed a whopping Rs1231 billion from internal and external sources during first half of current fiscal year,” to meet its fiscal needs. The government had to borrow Rs483 billion during first eight months that has pushed total domestic debt to Rs3.75 trillion. The major concern is that these figures are likely to soar further in the next fiscal budget. The situation of external debt is no better than domestic debt.
According to SBP AR, 08 external debt liabilities (EDL) that stood 51.7 per cent of GDP by June 2000 declined to 28.1 per cent by June 2007. It further declined to 26.9 per cent by end March 2008. Foreign debt grew at compound average rate 1.2 per cent between FY2001-07, at far less rate than growth in nominal GDP. In absolute terms, it increased from $37.2 billion to $40.5 billion during six financial years but grew at unprecedented pace of 13.3 per cent between July 2007 and March 08, from $40.5 billion to $45.9 billion. Major stakeholders in EDL are Paris Club (36.3 per cent), multilateral institutions (53.7 per cent) and IMF.
A number of factors such as deceleration of non-debt inflows, weakening of USD with respect to other international currencies like euro, SDR and yen, borrowing for earthquake affectees and deterioration in balance of payments contributed to surge in EDL that, in fact, had started soon after FY2005. According to latest estimate, “external debt could grow by around $7.25 billion that is likely to raise the external debt stock to around $52.5 billion by end of current fiscal year, around 31.0 per cent of projected GDP for current fiscal year. It would be higher than 27.6 per cent ($46.3 billion) for last fiscal year.
Economy has been supported during current fiscal year by FDI that fetched more than $3.0 billion despite financial liquidity crunch in international financial market and global economic recession and remittances by expatriates that are likely to be around $6.0 billion by the end of current fiscal year. Despite these positive developments the economy remains highly dependent on foreign loans and grants to address its external account. There are two viewpoints about it. First, external debt is within acceptable limit of GDP and hence it should not be a point to worry. It is also asserted in the same context that the government has no other option except to contract foreign debt to meet it foreign, fiscal and economic development needs. The other viewpoint is that indiscrete external borrowing could lead to a situation where new external borrowing might become essential to pay back old foreign debt.
Pakistan’s EDL are closely monitored by the IMF. According to its estimate, they are to increase to around 31.6 per cent of GDP by the end of FY09-10 and to 32.5 per cent by the end of FY 10-11becasue of substantial financing from multilateral institutions. The debt servicing will increase from 15.0 per cent of export of goods and services to 20.0 per cent during the same period. IMF makes conscious of the fact that, “relatively benign outlook is subject to serious downside risks. They include risks from higher non-interest current account deficit, lower growth, higher depreciation, higher interest rates, as well as lower FDI flows.” These observations are significant and need to be noted in the context of on going economic recovery.
Economic recovery challenge
Economic recovery challenge needs to be viewed in three different contexts of achieving macroeconomic stability, sustainable economic growth and finally the capacity to pay back TDL and EDL. Current global economic recession, security environment and development strategies to be implemented during next 3-4 years are quite relevant in this respect. According to the Ministry of Finance report, ‘ Review of the Economic Situation (July-March 2008-09)’, the economy is getting back to its original confidence after implementing measures according to $7.6 billion economic stabilisation programme that started from November,08. According to the report, “improvement in economic variables such as fiscal deficit, FX reserves build up, import compression and net zero borrowing from the SBP by end of April is quite visible.” This viewpoint has also been endorsed by the IMF although it wants to see much more improvement in many areas of the economy.
Prices of commercial commodities like oil and food commodities have relented substantially from mid-2008 during current fiscal year. It has eased pressure on the economy and helped achieving macroeconomic stability. Fiscal deficit during first ten months (July-April) is registered at 3.1 per cent of GDP and is likely to be lower than the limit of 4.2 per cent set by the IMF. It has not been reduced by generating more revenue but by drastically reducing development expenditure and by implementing few structural reforms such as removing subsidies on energy and increasing support price of cash crops mainly wheat. According to MoF, trade deficit is geared to be 4.3 per cent of GDP and current account deficit is likely to be around 5.9 per cent of GDP by end of current fiscal year. FX reserves with the SBP of Pakistan have increased mostly on borrowed money from paltry low $3.5 billion in October 2008 to $7.8 billion by around mid-April, 09
Agriculture sector is set to achieve growth target of 3.3 per cent thanks to bumper wheat crop. The latest estimate of 14 districts of the Punjab province show a surge of 30.0 per cent in wheat production and even if production in other provinces remains unchanged, overall wheat production may rise to 25.7 metric tons, well above the target. Cotton and rice have also registered positive growth of 7.3 per cent and 13.5 per cent respectively. Livestock sub-sector is also likely to achieve growth target of 3.2 per cent. Agriculture sector growth would augment over all growth of economy.
There are certain areas of the economy that have been influenced by domestic security, political and energy crisis and international recession. Export target and tax revenue collection targets are unlikely to be met. FBR collected Rs898 billion during July-April and it is unlikely to collect slightly more than Rs400 billion during last fiscal quarter to meet Rs1.3 trillion targets. Notwithstanding the positive trends in economy, high inflation, negative performance of LSM and high cost of debt servicing remain some of the weak areas of the economy.
Food and over all inflation have proved quite stubborn even by IMF standards that wanted the latter to be reduced to 12.0 per cent by end of current fiscal year. MoF Review gives a candid state of inflation. Food inflation during July-March period of the fiscal year was recorded 28.0 per cent against 13.8 per cent during corresponding period of last fiscal year. High food inflation is attributable to, “the stubbornness of the prices of some key commodities such as edible oil, pulses, rice, milk, sugar, poultry, meat, wheat, wheat flour and fresh vegetables.” Non-food inflation was recorded 19.2 per cent against 6.3 per cent during corresponding period of last fiscal year. It has remained persistently between 18-20 per cent through out the current fiscal year and is likely to stay at this level by end of current fiscal year. Keeping in view the current inflationary pressure, it is difficult to share the optimism of financial advisor the PM that inflation would be reined in to 6.0 per cent by end of next fiscal year.
One of the main concerns about economic recovery is rehabilitating LSM that has shown a negative growth of 6.0 per cent. It is causing multiple losses to economy such as comparatively higher trade deficit, low exports and increase in unemployment. Notwithstanding security concerns and global recession that have certainly negatively affected LSM, energy crisis and high interest rates on commercial borrowings have also negatively affected it. Economy is to register a growth of around 2.5 per cent.
Conclusion
The real issue is about sustaining macroeconomic stability for real economic recovery. It won’t be possible unless inflation is reduced considerably; LSM growth recovers, tax revenue collection increases according to potential of economy and dependence on foreign credit is reduced to bare minimum.
--------------------------------------------------------------------------------
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Business & Fenance Review
Forex trading analysis
Forex trading has the great potential of becoming a profitable and fulfilling career that will let you have a lifestyle that few other lucrative activities in the world can offer to people from many roads in life and without asking any of those men and women for a diploma or some special certification.
But Forex trading is not easy; it may be simple to enter and place your first trade but becoming a profitable trader is a different thing. You will need to acquire the right knowledge and techniques in order to understand and know when to enter or leave a trade always fulfilling the main objective every trader must have; making money.
There are two kinds of analysis you can perform on the Forex markets. They are known as technical analysis and fundamental analysis. It is common that traders tend to divide themselves into “technical” and “fundamentalists”. Each group devoting themselves to the main tools each kind of analysis gives them.
Technical forex traders base their trading on the analysis of the charts and the number of indicators derived from the plots of price oscillations and patterns.
Meanwhile Fundamentalists traders base their trading mostly on the fundamental numbers and economical indicators of countries economies. Though, even if divided, both tendencies tend to complement each other to some degree.
In this article I will place myself on the “fundamentalists” side and focus on one of the situations every forex trader must be aware of and don’t let the events involved affect his trading efforts.
This risky situation is that when unprecedented chaotic world events start to develop as the trading day goes on. The power of the media (tv, internet, printed) can magnify and sometimes it may even distort the events taking place and impacting the trading journey in a significant manner. The result of this magnification and rapid diffusion of the news about the series of unfavorable events taking place is an increased atmosphere of fear, confusion and uncertainty in the trading world.
And fearful traders are not prone to make the best trading choices because they have given themselves to panic and emotional reactions instead of reasoned and intelligent decisions.
If you need to have more specific examples of these kind of events you can search a bit inside your memories and consider the impact of just a few types of unfavorable chaotic world events as the political upheavals or corporate scandals of companies as; Enron, WorldCom, or of people as the case of Martha Stewart trial, etc. There is also the example of the terrorist attacks on Sep 11 in New York, March 11 in Spain, etc.
Also natural disasters: tsunamis, earthquakes, floods, freezes, droughts, hurricanes along with wars can cause great disruption in a trading journey.
In short, every forex trader should be totally sure that his method of trading has built-in safe guards (stops, limit orders) to prevent a major financial loss from his trading account in case any of the unfavorable events I mentioned above ever takes place. And being realistic, many of those events will surely happen in the future.
Back to main page
Forex trading has the great potential of becoming a profitable and fulfilling career that will let you have a lifestyle that few other lucrative activities in the world can offer to people from many roads in life and without asking any of those men and women for a diploma or some special certification.
But Forex trading is not easy; it may be simple to enter and place your first trade but becoming a profitable trader is a different thing. You will need to acquire the right knowledge and techniques in order to understand and know when to enter or leave a trade always fulfilling the main objective every trader must have; making money.
There are two kinds of analysis you can perform on the Forex markets. They are known as technical analysis and fundamental analysis. It is common that traders tend to divide themselves into “technical” and “fundamentalists”. Each group devoting themselves to the main tools each kind of analysis gives them.
Technical forex traders base their trading on the analysis of the charts and the number of indicators derived from the plots of price oscillations and patterns.
Meanwhile Fundamentalists traders base their trading mostly on the fundamental numbers and economical indicators of countries economies. Though, even if divided, both tendencies tend to complement each other to some degree.
In this article I will place myself on the “fundamentalists” side and focus on one of the situations every forex trader must be aware of and don’t let the events involved affect his trading efforts.
This risky situation is that when unprecedented chaotic world events start to develop as the trading day goes on. The power of the media (tv, internet, printed) can magnify and sometimes it may even distort the events taking place and impacting the trading journey in a significant manner. The result of this magnification and rapid diffusion of the news about the series of unfavorable events taking place is an increased atmosphere of fear, confusion and uncertainty in the trading world.
And fearful traders are not prone to make the best trading choices because they have given themselves to panic and emotional reactions instead of reasoned and intelligent decisions.
If you need to have more specific examples of these kind of events you can search a bit inside your memories and consider the impact of just a few types of unfavorable chaotic world events as the political upheavals or corporate scandals of companies as; Enron, WorldCom, or of people as the case of Martha Stewart trial, etc. There is also the example of the terrorist attacks on Sep 11 in New York, March 11 in Spain, etc.
Also natural disasters: tsunamis, earthquakes, floods, freezes, droughts, hurricanes along with wars can cause great disruption in a trading journey.
In short, every forex trader should be totally sure that his method of trading has built-in safe guards (stops, limit orders) to prevent a major financial loss from his trading account in case any of the unfavorable events I mentioned above ever takes place. And being realistic, many of those events will surely happen in the future.
Back to main page
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Select Country AfghanistanAlbaniaAlgeriaAndorraAngolaAnguillaAntigua/BarbudaArgentinaArmeniaArubaAustraliaAustriaAzerbaijanBahamasBahrainBangladeshBarbadosBelarusBelgiumBelizeBeninBermudaBhutanBoliviaBosnia-HerzegovinaBotswanaBrazilBritish Indian Ocean Terr.British Virgin Is.BruneiBulgariaBurkina FasoBurma (Myanmar)BurundiCambodiaCameroonCanadaCape VerdeCayman IslandsCentral African RepublicChadChileChinaColombiaComorosCongoCosta RicaCroatiaCubaCuracaoCyprusCzech RepublicDenmarkDjiboutiDominicaDominican RepublicEast TimorEcuadorEgyptEl SalvadorEquatorial GuineaEritreaEstoniaEthiopiaFalkland IslandsFijiFinlandFranceFrench AntillesFrench GuianaGabonGalapagos IslandsGambiaGeorgiaGermanyGhanaGreeceGreenlandGrenadaGuadeloupeGuantanamo BayGuatemalaGuineaGuinea-BissauGuyanaHaitiHondurasHong KongHungaryIcelandIndiaIndonesiaIranIraqIrelandIsraelItalyIvory CoastJamaicaJapanJordanKazakhstanKenyaKiribatiKuwaitKyrgyzstanLaosLatviaLebanonLesothoLiberiaLibyaLiechtensteinLithuaniaLuxembourgMacaoMacedoniaMadagascarMalawiMalaysiaMaldivesMaliMaltaMarshall IslandsMartiniqueMauritaniaMauritiusMexicoMicronesiaMoldovaMonacoMongoliaMontserratMoroccoMozambiqueNamibiaNauruNepalNetherlandsNew ZealandNicaraguaNigerNigeriaNorth KoreaNorwayOmanPakistanPalauPanamaPapua New GuineaParaguayPeruPhilippinesPolandPortugalPuerto RicoQatarRomaniaRussian Fed.RwandaSamoaSan MarinoSao Tome & PrincipeSaudi ArabiaSenegalSerbiaSeychellesSierra LeoneSingaporeSlovakiaSloveniaSolomon IslandsSomaliaSouth AfricaSouth KoreaSpainSri LankaSt. Kitts and NevisSt. LuciaSt. MaartenSt. MartinSt. Vincent and the Gren.SudanSurinameSwazilandSwedenSwitzerlandSyriaTahitiTaiwanTajikistanTanzaniaThailandTogoTongaTrinidad and TobagoTunisiaTurkeyTurkmenistanTurks and Caicos Is.TuvaluU.A.E.UgandaUkraineUnited KingdomUnited StatesUruguayUS Virgin Is.UzbekistanVanuatuVenezuelaVietnamWestern SaharaYemenZambiaZimbabwe
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Saturday, September 19, 2009
Stop-loss discipline
As you can see from the description above, there are significant opportunities and risks in foreign exchange markets. Aggressive traders might experience profit/loss swings of 20-30% daily. This calls for strict stop-loss policies in positions that are moving against you.
Fortunately, there are no daily limits on foreign exchange trading and no restrictions on trading hours other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets and a low risk of getting caught without the opportunity of getting out. Of course, the market can move very fast and a stop-loss order is by no means a guarantee of getting out at the desired level.
But the main risk is really an event over the weekend, where all markets are closed. This happens from time to time as many important political events, such as G7 meetings, are normally scheduled for weekends.
For speculative trading, we always recommend the placement of protective stop-lossorders. With Saxo Bank Internet Trading you can easily place and change such orders while watching market development graphically on your computer screen.
Fortunately, there are no daily limits on foreign exchange trading and no restrictions on trading hours other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets and a low risk of getting caught without the opportunity of getting out. Of course, the market can move very fast and a stop-loss order is by no means a guarantee of getting out at the desired level.
But the main risk is really an event over the weekend, where all markets are closed. This happens from time to time as many important political events, such as G7 meetings, are normally scheduled for weekends.
For speculative trading, we always recommend the placement of protective stop-lossorders. With Saxo Bank Internet Trading you can easily place and change such orders while watching market development graphically on your computer screen.
Interest Rate Differentials
Different currencies pay different interest rates. This is one of the main driving forces behind foreign exchange trends. It is inherently attractive to be a buyer of a currency that pays a high interest rate while being short a currency that has a low interest rate.
Although such interest rate differentials may not appear very large, they are of great significance in a highly leveraged position. For example, the interest rate differential between the US dollar and the Japanese yen has been approximately 5% for several years. In a position that can be supported by a 5% margin deposit, this results in a 100% profit on capital per annum when you buy the US dollar. Of course, an even more important factor normally is the relative value of the currencies, which changed 15% from low to high during 2005 – disregarding the interest rate differential. From a pure interest rate differential viewpoint, you have an advantage of 100% per annum in your favour by being long US dollar and an initial disadvantage of the same size by being short.
Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions!
Such a situation clearly benefits the high interest rate currency and as result, the US dollar was in a strong bull market all through 2005. But it is by no means a certainty that the currency with the higher interest rate will be strongest. If the reason for the high interest rate is runaway inflation, this may undermine confidence in the currency even more than the benefits perceived from the high interest rate.
Although such interest rate differentials may not appear very large, they are of great significance in a highly leveraged position. For example, the interest rate differential between the US dollar and the Japanese yen has been approximately 5% for several years. In a position that can be supported by a 5% margin deposit, this results in a 100% profit on capital per annum when you buy the US dollar. Of course, an even more important factor normally is the relative value of the currencies, which changed 15% from low to high during 2005 – disregarding the interest rate differential. From a pure interest rate differential viewpoint, you have an advantage of 100% per annum in your favour by being long US dollar and an initial disadvantage of the same size by being short.
Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions!
Such a situation clearly benefits the high interest rate currency and as result, the US dollar was in a strong bull market all through 2005. But it is by no means a certainty that the currency with the higher interest rate will be strongest. If the reason for the high interest rate is runaway inflation, this may undermine confidence in the currency even more than the benefits perceived from the high interest rate.
Spot and forward trading
When you trade foreign exchange you are normally quoted a spot price. This means that if you take no further steps, your trade will be settled after two business days. This ensures that your trades are undertaken subject to supervision by regulatory authorities for your own protection and security. If you are a commercial customer, you may need to convert the currencies for international payments. If you are an investor, you will normally want to swap your trade forward to a later date. This can be undertaken on a daily basis or for a longer period at a time. Often investors will swap their trades forward anywhere from a week or two up to several months depending on the time frame of the investment.
Although a forward trade is for a future date, the position can be closed out at any time - the closing part of the position is then swapped forward to the same future value date.
Although a forward trade is for a future date, the position can be closed out at any time - the closing part of the position is then swapped forward to the same future value date.
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