Forex is the most simple market in the world. As we explain in our book Splitting Pennies - Forex is the underpinning of the world's financial system. Although it is also the least understood market, there's nothing 'sophisticated' about FX. Take a dollar, exchange it for a euro. The rate changes - exchange it back. Simple! Trading money.
There is no '2 day settlement' in Forex, a custodian, there's no Reg D, no Reg NMS - there's no HFT front running your orders, there's no 'order types' - there's no exchange rules (because there's no exchange). Actually, when you strip away the complexities of most markets like securities, bonds, real estate, commodities, FX is many times over the most simple market.
Understandably, the securities market is the most widely promoted to investors because of the potential for making high returns from participating in corporate ownership (and thus ownership of profits). But securities are a derivative. Investors don't really own the companies - they own the shares. And actually to be technical, they don't own the shares too - they are controlled by a huge custodian DTCC. The securities, bond, and futures markets are the core of modern capitalism. But they aren't a necessity, they are an abstration and thus - have complex rules. Or to say differently - the banking system needs the real economy - the real economy doesn't need the banking system.
How do these abstract markets drive inflation? Here's how. QE doesn't directly go into the economy. However, by keeping interest rates low, both in real terms and buy the Fed's various asset purchase programs - it means money has never been cheaper. With cheap money, it's easy for i-banks to borrow at zero or near zero rates, invest in any index at 2x or 4x leverage and get their 20% - 40% per year with virtually no risk (that is, no seen risk - there is huge tail risk that one day the market will collapse, which it will for sure, like the big bubble that it is.)
The 'stock markets' have become so intertwined with the real economy, they have made themselves a necessity. Like a virus that has taken over a host, now it would be practically impossible to kill the market without affecting the overall economy. All of this has become so complicated, with so many involved parties - it has become a giant spider web.
On the topic of the Fed and their direct stock market alleged manipulation, consider the following. The Fed is owned by the member banks. The Fed gives it's QE to the member banks, almost all of which are now publicly traded companies. Here's where the paper trail begins for the 'conspiracy crowd' about the Fed being owned by nefarious 13 families: Public disclosure rules mean that anyone can lookup what's going on at Bank of America (BAC). Hiding significant information at public companies is very difficult, and becoming more and more difficult with the digitization of records, communications, and basically all aspects of business, which by the way is all 'doubled' and recorded on a network level by ATT (T) another public company - and stored in an NSA database. America Inc. is technically a corporation and the states such as South Carolina are more like countries (hence the name 'states') - although you can't buy and sell shares of America Inc. you sort of can, it's called immigration - citizens of USA are sort of like shareholders. And there's a short side too, record numbers of US Citizens are giving up their citizenship. So, does the Fed manipulate the stock market? It's not a fair question, because Fed ownership and operations are completely intertwined with the stock market. During the time when the Fed was created, America was just passing the wildcat banking era, where there were thousands of private banks. Do not confuse 'private banking' with a 'privately owned bank' - private banking is discreet services for rich people who may want to hide their assets or not let others know how rich they are. Privately owned banks are nearly non-existent in the USA today, for a number of reasons - mostly caused by generational wealth transfer and generally a trend towards the institutionalization of assets. What does that mean? It means that 100 years ago, things were in YOUR name, if you were JP Morgan or Andrew Carnegie. Today, it's all in tax havens, the Carnegie foundation, trust funds, and almost nothing is in YOUR name. That includes banks, which are mostly publicly traded and thus, publicly owned. The individual has become obsolete.
So all these tendencies, make the market so complicated it's even confusing to describe.
All this drama created by Nixon is really in the eye of the beholder - this idea of 'economic collapse' is a fantasy promulgated by religious types in Armageddon style packaging, as if the Earth will explode and burn in a big singularity event. The reality is that 'economic collapse' is happening every day, simply that only some of us notice it.
Forex simply gauges the tides as they ebb and flow, EUR/USD rate changes, but not really that much. Brexit gave us a 9% move which is huge for FX but not really statistically significant in the grand scheme of things.
Take a look at EUR/GBP for last 10 years:
This is a monthly chart. You can see why FX is not interesting for the general public. But it takes a lot less time to understand FX than the stock markets. FX is simple.
As we head into a potential complete meltdown of the Euro, and tomorrow's NFP, we're heading into an event that may change the face of FX forever.
With the upcoming second round of the French Presidential Election this weekend, we require that your account balance plus any open profit or loss covers at least 3% of the total notional exposure across all EUR crosses and EUR Equity Index CFDs by 4pm (UK time) Friday, 5th May 2017. Where the cover is lower than 3%, we may reduce your positions to increase the cover on your account before the market close.
Exit polls will be released prior to the market open on Sunday, 7th May 2017 and there is increased risk of wide spreads and large price gaps on the market open and through the night. Please ensure you are comfortable with the exposure on your open positions leading into the market close on Friday, 5th May 2017.
If you have any queries, please do not hesitate to contact Client Services by calling +44 20 3192 XXXX or emailing XXXXXX.
FX and CFDs are leveraged products that can result in losses exceeding your deposit. They are not suitable for everyone so please ensure you fully understand the risks involved.
Client Services Team