Forex – The Speculators

When something unexpected happens in financial markets that hurts ordinary people, as in the CHF/RON quotation, the ones who got the blame first, are often the ‘speculators’.

Some unknown, but powerful forces in high rise buildings in New York or London making money to the cost of house buyers in Craiova or Bucharest?! If you believe that, then better stay off the markets and spend your money on booze and babes.

Before blaming speculation for all the trouble, think about that:

  1. When you buy a stock of, let’s say Microsoft, you do this most likely in anticipation of a rising price of the stock in the future. In other words, you speculate. Why should you be blamed for, when the stock really rises and you sell with a profit?
  2. In any financial transaction you make, you have a counterpart. This counterpart is anticipating the opposite development. In other words, when you want to buy Microsoft at the current price of 50 Dollar a share, because you expect a rise, you cannot visit a store and buy shares at discretion. You, actually your broker, first has to find someone else, who is willing to sell Microsoft at 50, because this investor is expecting the stock to fall, otherwise he wouldn’t sell.

Moving on to forex markets, it’s important to have in mind, that currencies are always, no exception, traded in pairs, meaning each forex-transaction contains two currencies – and two different opinions about their future values,

Let’s say, it’s October, you have 9000 RON on your account and planning a trip to Paris with your wife the following spring. Currently, the 9000 RON are valued 2000 EUR, just about what the Paris-trip is costing you.

But you expect/speculate the RON to lose in value vs the EUR till you fly to Paris in April. Instead of cutting your trip short, you decide to change your RON into EUR right now, six months before you visit the Louvre and Notre-Dame.

You make a forex transaction – but with whom? Someone on the other side of the table has to be willing, to buy your 9000 RON and sell you 2000 EUR for that. If that other person would expect/speculate the same as you – a sinking RON vs the EUR – why should he agree in the transaction?

This is a very simplified description of a forex transaction, but it gives you two important facts.

  1. Each speculator needs a counter-speculator when buying or selling
  2. Each forex-transaction contains two different currencies and two different opinions

You surely agree, that a forex-transaction for the next vacation, even when it’s made by many travelers, do not influence the exchange rate pretty much. And although speculation is in fact very common in forex markets, and the big boys are moving huge amounts, they are trading with the 4th, or 5th position behind the comma and influence the exchange rate only on a very short term. And believe me, they have no intention to harm romanian house buyers, they want to make a quick buck – regardless of a currency-pair – when they see an opportunity to profit. And, don’t forget, for each winning trade, there a has to be a loosing side.

So, I guess we can pretty much exclude ‘speculation’ as the prime boogeyman for the sinking RON vs the CHF, that brought so much troubles into romanian houses.

It’s time we come to the core of forces, who are really in the driver’s seat, when it comes to mayor currency movements, especially why the RON lost so much in value since 2007.

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You might be surprised, but hopefully not upset with me, when I am telling you, that no foreign bank, but Romania itself is the bigger part responsible for the downfall of the RON vs EUR or CHF and the desperation of their own citizens, as you find out in the next chapter: http://www.theleader.ro/forex-the-flow-of-money/

 

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