Balance of trade

Definition

The balance of trade forms part of the current account, which also includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position. The trade balance is identical to the difference between a country's output and its domestic demand (the difference between what goods a country produces and how many goods it buys from abroad; this does not include money re-spent on foreign stocks, nor does it factor the concept of importing goods to produce for the domestic market). Measuring the balance of trade can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by a few percent; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely. Factors that can affect the balance of trade figures include: Prices of goods manufactured at home (influenced by the responsiveness of supply)Exchange rates regarded in 1933Trade agreements or barriersOffset agreementsOther tax, tariff and trade measuresBusiness cycle at home or abroad. The balance of trade is likely to differ across the business cycle. In export led growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle. Strong growth economies such as the United States, Australia and Hong Kong run consistent trade deficits, as do poorer growing economies (where heavy investment fuels growth and the trade deficit). Mature but stagnant economies such as Canada, Japan, and Germany typically run trade surpluses. China also has a trade surplus[citation needed]. A higher savings rate generally corresponds with a trade surplus. Correspondingly, the United States with its negative savings rate consistently has high trade deficits

Trade deficit is not significant

Those who defend this position refer to explanations of comparative advantage. Buyers in the receiving country send the money back. A firm in America sends dollars for Brazilian sugarcane, and the Brazilian receivers use the money to buy stock in an American company. This may lead to profits leaving the U.S however as Americans may forfeit control. Although this is a form of capital account reinvestment, it may not be a liability on anyone in America. Such payments to foreigners have intergenerational effects: by shifting the consumption schedule over time, some generations may gain and others lose . However, a trade deficit may incur consumption in the future if it is financed by profitable domestic investment, in excess of that paid on the net foreign debts. Similarly, an excess on the current account shifts consumption to future generations, unless it raises the value of the currency, detering foreign investment. However, trade inequalities are not natural given differences in productivity and consumption preferences. Trade deficits have often been associated with international competitiveness. Trade surpluses have been associated with policies that skew a country's activity towards externalities, resulting in lower standards. An example of an economy which has had a positive balance of trade was Japan in the 1990s. Milton Friedman argued that trade deficits are not important as high exports raise the value of the currency, reducing aforementioned exports, and vise versa for imports, thus naturally removing trade deficits not due to investment. This opinion is shared by David Friedman, who has said that they are 'fossil economics', based on ideas obsolete since David Ricardo.

John Maynard Keynes on the balance of trade

In the last few years of his life, John Maynard Keynes was much preoccupied with the question of balance in international trade. He was the leader of the British delegation to the United Nations Monetary and Financial Conference in 1944 that established the Bretton Woods system of international currency management. He was the principal author of a proposal—the so-called Keynes Plan—for an International Clearing Union. The two governing principles of the plan were that the problem of settling outstanding balances should be solved by 'creating' additional 'international money', and that debtor and creditor should be treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected, in part because "American opinion was naturally reluctant to accept the principal of equality of treatment so novel in debtor-creditor relationships". [21] His view, supported by many economists and commentators at the time, was that creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious consequences. In the words of Geoffrey Crowther, then editor of The Economist, "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos." These ideas were informed by events prior to the Great Depression when—in the opinion of Keynes and others—international lending, primarily by the United States, exceeded the capacity of sound investment and so got diverted into non-productive and speculative uses, which in turn invited default and a sudden stop to the process of lending. Influenced by Keynes, economics texts in the immediate post-war period put a significant emphasis on balance in trade. For example, the second edition of the popular introductory textbook, An Outline of Money,devoted the last three of its ten chapters to questions of foreign exchange management and in particular the 'problem of balance'. However, in more recent years, since the end of the Bretton Woods system in 1971, with the increasing influence of Monetarist schools of thought in the 1980s, and particularly in the face of large sustained trade imbalances, these concerns—and particularly concerns about the destabilising affects of large trade surpluses—have largely disappeared from mainstream economics discourse and Keynes' insights have slipped from view, they are receiving some attention again in the wake of the financial crisis of 2007–2009

Market participants

Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Hedge funds as speculators

About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

Retail foreign exchange brokers

There are two types of retail brokers offering the opportunity for speculative trading: retail foreign exchange brokers and market makers. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated by the CFTC and NFA might be subject to foreign exchange scams. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.

Non-bank Foreign Exchange Companies

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account.

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies.These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

Money Transfer/Remittance Companies

Money transfer/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.

Foreign exchange market

Forex

The foreign exchange market (currency, forex, or FX) market is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies.FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971. Now, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008. The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.

Money Manager Services

Money Manager Services

Money managers and CTAs may take advantage of CMS Forex’s advanced Forex trading software and white labeling possibilities. With VT Trader™, placing trades and monitoring several accounts simultaneously is a breeze.

By placing trades for all your clients with one click instead of a dozen, you will be able to bypass the tedious aspects of account management and focus on your trading strategy. CMS Forex also offers an easy to use multi-account management interface, allowing you to monitor and trade on each account individually or all at once at your choosing. We also offer comprehensive reporting tools for monitoring and analyzing your clients’ accounts. With the addition of Percent Allocation Management (PAM) functionality, CMS Forex’s money manager services are better than ever. With PAM, each individual trader is allocated a percentage of the total traded position in proportion to his or her account equity. The risk and reward are thereby shared amongst all the trader’s accounts.

In addition, larger money managers have the option of choosing our white labeling solution, featuring a custom-branded platform and greater control over individual accounts.

Please note, the white labeling option is available only for qualified financial

Introducing Brokers

Introducing Brokers

The Introducing Brokers (IB) program enables traders and firms to receive compensation for referring new customers to CMS. By working with CMS, the IB will have access to CMS's proprietary trading technology and 24-hour dealing desk. The IB program is an ideal way to increase your ability to grow your client base and receive added compensation.

Available IB Services Include:

Back Office CMS provides Introducing Brokers with extensive back office services, including business report statements available in real time, pip and dollar commission reporting, and volume and IB fee reporting, which allows the IB to easily calculate his/her clients' monthly trading volume and profit/loss.

Potential Introducing Brokers Include:

Financial services companies looking to move their Forex trading operations online with the fewest possible expenses.
Online brokerages wishing to expand their range of services by offering their clients access to the Forex market.
Companies involved in financial analysis wishing to offer their clients online Forex trading.
In addition to the above services, customized solutions can be generated to meet your specific needs.

Carry Trade

What is a Carry Trade?

All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Each currency has a different interest rate attached to it determined partly by policy authorities and partly by market demand. When taking a foreign exchange position a trader holds long position one currency and short position in another. Each day, the trader will collect the interest on the long side of their trade and pay the interest on the short side. If the interest rate on the purchased currency is higher than that of the sold currency, the result is a net inflow of interest. If the sold currency’s interest rate is greater than the purchased currency’s rate, the trader must pay the net interest.

Carry Trade As A Strategy
For many years, money managers and banks have utilized the inflow and outflow of yield to collect consistent income in times of low volatility and high risk appetite. Holding only one or two currency pairs would invite considerable idiosyncratic risk (or risk related to those few pairs held); so traders create portfolios of various carry trade pairs to diversify risk from any single pair and isolate exposure to demand for yield. However, even with risk diversified away from any one pair, a carry basket is still exposed to those conditions that render this yield seeking strategy undesirable, such as: high volatility, small interest rate differentials or a general aversion to risk. Therefore, the carry trade will consistently collect an interest income, but there are still situation when the carry trade can face large drawdowns in certain market conditions. As such, a trader needs to decide when it is time to underweight or overweight their carry trade exposure.

Learning Forex

How To Learn Forex

To learn Forex Trading, one must learn about Forex and one must learn about trading; while it is not always easy to separate one from the other, it may be more useful to attempt to look at these as two disciplines separately at first. Each requires a deep understanding of its own, each offers numerous and assorted ways to learn it. To begin, one should always learn the Forex (foreign exchange) market first, even if only its basics, and even if only in a crash-course. There are many ways in which one can do so: one could choose to study the Foreign Exchange market formally, that is to say, via online classes, webinars, and/or via seminars, lectures, tutorials, university classes, or one could also choose a less formal method, that is to say, via (online or not) forums, private/public/interactive communication with experts, professionals, and even other students of Forex. Basic knowledge that should be acquired before beginning to trade forex includes: Forex terminology, Forex symbols, Forex charts and graphs, history of the Foreign Exchange market, historical data, evolution of currencies, worldwide monetary systems, market activity, market trend, financial instruments, market professions (—the meaning of brokers, investors, consultants, etc), political factors that affect the market, economic factors that affect the market (—for example: interest rate, GDP, employment rates, etc), behavioral finance, psychological factors that affect the market, and last but not least, theories. Once one has sufficient theoretical knowledge, one could go on and learn trading. Trading is a skill, and like any other skill, it needs to be practiced and practiced in order to be perfected. Practicing is almost the best mental training tool. This is why, when it comes to trading, the most useful way to learn forex trading is to practice (various trading platforms not only offer their services for free, but enable user to practice with demo money and with real-market rates, i.e. coming as close as possible to real forex trading but without having to risk losing any money). Via trading simulations, one could feel trading out; via trial and error one will know which trading techniques suit him/her best, which long-term transactions work, which require overnight trading, which need to be short-lives, how to control risk. Having learned a satisfactory amount about the Foreign Exchange market, one could almost intuitively apply the theoretical knowledge into the practice of Forex trading. For example—if a news release came out about an increase in the unemployment rates, one should immediately be alarmed, for higher unemployment rates are not good for an economy, and will have a negative effect on it, which in return will have a negative effect on that country’s currency. One, of course, will then act accordingly (sell or buy a certain currency as a result). This is to say, that the more knowledge one posses, the more s/he will be able to navigate the world of Forex automatically, for s/he will understand terms and charts (and follow their constant updating) and will know how to react fast to the release of economic news. Studying never ends. It is important always to keep oneself on a learning curve; to stay in tune with this ever-growing market. One could always read books, magazines, visit blogs— and of course, read the newspapers; one’s awareness to what goes on around him/her is a key component in becoming an experienced trader