Posts Tagged ‘Market’

On the face of it, this may seem only to con?rm the worst fears of those who see currency speculation as an intrinsically malign force, ready to bring down currency systems and governments on a whim. Surely, if currency speculation is such a dominating force within the global currency markets, then it is currency speculation that is responsible for currency crises. Following on with this logic, some may take the view that action should be taken to ensure that currency speculation cannot cause such devastation and damage again! On the face of it, these are understandable conclusions. However, just because they are understandable does not make them right. Indeed, I would suggest that they are at best overly simplistic and at worst ?atly wrong for the following reasons:
Currency speculation does not act or take place in a vacuum. Rather it is a response to changes in fundamental or technical dynamics.
The essential aim of currency speculation is not to bring down governments, nor to hurt countries economically, nor for that matter to break currency pegs. Simply put, the aim is to make money, pure and simple.
Currency speculation therefore is neither benign nor malign. Both of these terms have emotional if not moral connotations. Currency speculation is amoral. It aims to make money, whether buying or selling a currency, and it will do that in direct and proportional response to government economic policy.
In cases such as currency crises where substantial destruction is caused, currency speculation is the symptom rather than the underlying disease. Indeed, in the case of the UK in 1992, currency speculation was the cure to the disease, which was a ridiculously overvalued exchange rate value of sterling within the ERM.
Currency speculation does indeed provide a valuable service, in giving liquidity to the productive areas of the economy.
The idea that a speculator is a seller and an investor is a buyer is worse than nonsense. It is propaganda designed to cover policy mistakes.
In line with this, there are many more kinds of speculation than just currency speculation. Was not the NASDAQ bubble of 1999–2000 speculation? When Alan Greenspan dared to try to temper that irrational exuberance did he not get shouted down by the public and b congress?
This series of posts is for both those who seek a clearer understanding of currency speculation, why and how it takes place, and also for the currency speculators themselves. The latter is done with some humility for there are currency speculators who are amongst the most revered and respected — and honourable — participants within the currency markets. In my career, I have met many of these and many are amongst the most brilliant minds out there. Thus it is with care that I have the temerity to suggest that some of these still have a few things to learn about the currency markets! That said, another perspective is always useful. I have certainly found that myself. My experience is as someone who has followed the currency markets for the last decade, ?rst as a journalist, then as an analyst, then as a manager of a currency business and ?nally as a currency strategist for an investment bank. Perspective is important and being able to look at an issue from several different angles sometimes critical. Thus, I hope I can say that I have gained immeasurably from the wisdom of my economist colleagues. We look at the same question from two completely different perspectives. Equally, it is my hope that even some of the most experienced currency speculators may gain from my no doubt different perspective.

So armed with this de?nition, however inadequate, let us now look at the issue of currency speculation in more depth. The second aspect of currency speculation to realize is its size. On the face of it, it is immense. The global currency markets turn over some USD1.2 trillion in daily volume, according to the 2001 report by the Bank of International Settlements. That is the rough equivalent of world trade in global goods and services every day. In the last two decades, as barriers to capital have broken down and capital markets become liberalized, in line with the move to liberalize trade in goods and services, capital ?ows have played an increasingly important role in global currency markets. By comparison, world trade has seen its role diminish proportionally as a determining factor in exchange rate movement. Trying to work out the percentages of global currency volume is very far from an exact science given that one is faced with issues such as double counting and so forth. Nevertheless, it is possible to get a rough idea of the relative ?ow importance of the different sectors of the market. Put together, and being generous rather than conservative in one’s estimation, world trade and investment (portfolio and direct) makes up around 30% of currency market volume. The rest, using our de?nition, is currency speculation, with no underlying asset behind it. I have not the slightest doubt that these ?gures will cause debate, if not outright rejection. The truth however is that I have been charitable and generous with the ?rst half of the equation, that of trade and investment. The imbalance in favour of currency speculation should actually not be that surprising. If one thinks about it, the economic text book de?nition of a currency speculator as a liquidity provider to the productive areas of the economy might suggest an eventual 50/50 role between the two sides. The liberalization and deregulation process seen over the last three decades has meant that we have gone far beyond that.