Forex (foreign exchange market) trading has long been one of the key features of 21st century casino capitalism. Thousands of cash hungry speculators all around the world spend hours in front of their computer screens every day- looking to make quick, easy profits by buying and selling currencies. Millions of currency trading articles are swamping the internet and telling potential investors about the big money that can be made at the click of a button. Sure, like any form of gambling, as well informed as the players may be, the stakes are high and both the prizes and losses can be huge. The real winners are, of course, the hundreds of online companies who cream commission off each trade. While you want to be dynamic and versatile, you don’t want to spend too much of your hard earned money on covering losses and hidden charges. So therefore, when investing in currencies, it is very important to get your strategy right!

 

So if you are looking to get involved in currency speculation, the first thing to do is to understand exchange rates and what economic factors determine their fluctuations. Like anything else, the value of a currency- relative to that of other countries, depends on the amount of demand there is from short term buyers and how attractive it is to long term investors. When you are looking to put your financial weight behind a particular nation’s currency, you need to take the following factors into account:

 

• Inflation: If a country is suffering from inflationary pressures, and therefore the purchasing power of its money is in decline, the value of its currency will tend to decrease.

 

• Interest rates: When central banks raise or lower interest rates, they essentially determine the levels of return a lender can make from their savings. If people can make 2% by holding their cash in a British savings account or 5% in a Canadian equivalent, savvy wealth preservers will try to utilise the latter. In doing so they will push the demand for Canadian dollars upwards.

 

• Political/Economic stability: Nobody wants to hold their wealth in the currency of a war torn or internally unstable nation. Investors will always seek safe havens for their cash holdings. The popularity of the Swiss franc in recent years exemplifies this point. Sensible investors also look for markets with long term growth potential in stocks, real estate and other assets. 

 

• Public finances: However politicians and central bankers try to paint over the cracks and re-assure the markets, the fact remains that unsustainable levels of debt are a big turnoff for any kind of investor. The Eurozone’s collective levels of structural debt and the dire public finances of several member states has destroyed confidence in the Euro as a currency. 

 

With these factors in mind, the next challenges in building your currency investment strategy are timing and asset identification. In terms of timing, there is a stark difference between the ‘quick cash’ day traders and the ‘progressive growth’ strategists. With nerves of steel and a prophetic instinct for global economic trends, millions can be made by buying and selling currencies within very short time frames. 16 September, 1992 came to be known as ‘Black Wednesday’ by the UK media. In what was one of the biggest economic disaster days in recorded history, the British government spent the entire day and night grappling with the currency crisis that resulted in Britain departing from the ERM (Exchange Rate Mechanism). Whilst the total loss incurred by the UK Treasury was estimated at almost GBP 3.5 billion, prolific currency guru George Soros netted almost USD 1 billion in profit by short selling the pound.

 

This is not the only instance of individuals netting huge fortunes by playing the forex markets, but it is certainly a rare occurrence in comparison to the billions that are lost each year worldwide. History and common sense tell us that if something is too good to be true- it probably is; and furthermore, the best investments are usually the ones that are orientated towards long term growth. Finding the right currencies for future growth opportunities will earn you plenty of profit going forward. 

 

Regardless of your investment timeframe, the trick to success is backing the ‘winning horse’. The Chinese yuan has dominated discussions within the investment world for many years. Despite growing consistently against all major currencies year on year for the past decade or so, many speculators are still expecting massive appreciation of China’s sought after currency over the coming years. The US dollar, which has long been the world’s reserve choice, is seemingly attracting more gloomy predictions for its future value as time goes on. Looking at the incredible amount of depreciation the dollar has seen over the last few decades and the consistent money printing by the Federal Reserve, it is difficult to be optimistic.

 

For investors looking at future economic superpowers, the Indonesian rupiah, Brazillian real and the recently trampled Indian Rupee could all be interesting long term bets. Similarly, commodities and global trading giants Australia and Canada have seen some encouraging currency appreciation in recent years; there could be more to come. And last but not least, the thriving financial markets in Singapore and Hong Kong are sure to attract further demand for their currencies for many years.

 

Whatever currency (or currencies) you choose to hold your wealth in, the most important thing to do is not leave it sat in a cupboard earning no interest. Holding stocks, real estate, bonds and other money making assets, in conjunction with currency appreciation, will make you the big money. If you like the growth prospects of a particular country or geographical region, don’t just hold physical currency; acquire assets!