Forex Market: Unlocking Opportunities for Investors
In 2019, the global foreign exchange market (forex) was valued at a jaw-dropping $2.4 quadrillion.
In fact, this is equal to more than 50 times China, Japan, Germany, India and the U.S.’s economic output combined. Institutional investors, such as investment banks, pension funds, and large corporations have typically dominated this space, but there are avenues for individuals to enter the market as well.
This infographic from Compare Forex Brokers breaks down the world’s most interconnected financial market, and how individual investors can start trading.
The Forex Market: A Global Landscape
Across the forex market, 170 major, minor, and exotic currency pairs can be traded as contracts for difference (CFDs). A CFD enables you to speculate on whether the price of an asset will rise or fall.
Here, trades are conducted on over the counter (OTC) markets—non-centralized markets made up of a network of participants. This is different from traditional markets, such as the S&P 500 and the Nasdaq, which operate on formal, centralized exchanges.
While the forex market is by nature, decentralized, these core regions show where forex transactions are most concentrated by market participants including banks, commercial businesses, or individual investors.
Globally, the majority of forex trading takes place within the following hubs.
|Forex Trading Centers (2019)||Country||Share of Global Over the Counter (OTC) Forex Turnover|
The UK accounts for over 43% of global forex trading, averaging $2.7 trillion daily according to the 2019 Triennial Central Bank Survey by the Bank for International Settlements. London’s geographic location between the U.S. and Asia makes it an optimal forex trading centre—a trend that has held strong over the last 50 years.
With forex trading in the U.S. jumping over 50% in the last decade, the U.S. is the next most active forex market. Meanwhile, averaging $633 billion in trading volumes in 2019, Singapore is Asia’s largest forex trading center, with Hong Kong following close behind.
The Top Seven Currency Pairs
What are the most highly-traded currency pairs?
Overall, 68% of global forex trading falls into seven major currency pairs.
|Top Seven Currency Pairs||Percentage of Total|
|1||United States Dollar vs Euro||24.0%|
|2||United States Dollar vs Japanese Yen||17.8%|
|3||United States Dollar vs Great British Pound||9.3%|
|4||United States Dollar vs Australian Dollar||5.2%|
|5||United States Dollar vs Canadian Dollar||4.3%|
|6||United States Dollar vs Chinese Yuan||3.8%|
|7||United States Dollar vs Swiss Franc||3.6%|
Currency prices are impacted by factors including inflation, international trade, political stability, among other macroeconomic factors.
Breaking Down Institutional and Retail Trading
While commercial and central banks, hedge funds, and investment managers make up most of the forex market, only 5.5% are individual investors.
Importantly, they differ in a few key ways.
|Institutional Forex Trading||Retail Forex Trading|
|- Buy and sell the physical currency|
- Interdealer market: Large institutions trade on an interdealer market, which is a non-centralized network of dealers
- Less formal: Often trades are conducted by phone, email or instant message.
- Non-transparent: Execution prices and buy/sell orders are not visible to the market.
|- Buy and sell contracts for difference (CFD)
- Contracts for Difference (CFD): CFDs allow traders to speculate on the price of an underlying asset. Traders do not own the underlying asset.
- Long and Short Trades: Traders can take a long or short position:
- Long position: buying a CFD with the expectation the asset's market price will increase.
- Short position: selling a CFD with the expectation the asset's market price will decrease.
For various reasons, retail forex trading increases in popularity year after year. However, before diving in, it is important to know the stakes involved in this speculative market.
Understanding the High Risk of Forex Trading
Retail forex trading is, at is core, very risky.
In 2019, 71% of all retail forex trades lost money. One explanation is the highly leveraged nature of the market—many investors trade using borrowed money. But while trading with leverage can magnify losses, it also applies to gains.
Key Benefits of the Forex Market
While there is risk inherent in the market, what are some of the advantages in forex trading?
- Low transaction costs: No exchange or regulatory fees. Overall trading costs are low with both commission and no commission pricing structures available.
- High liquidity: Along with being the largest market globally, it is also the most liquid with $6.6 trillion in daily trading volume.
- 24-hour market: Trading is not confined to limited hours or time zones.
- Leverage: Forex brokers offer retail traders leverage which allows the to increase their exposure
Unlike equities, currency trading is all about relativity. A currency can depreciate overall, but can also appreciate relative to a currency that has depreciated even more.
Connect to New Markets
While big gains are possible, many trades lose money, but regulatory improvements have helped build trust in the market.
Meanwhile, multiple digital platforms provide a link to global currencies, allowing retail forex traders to enter the market and trade from any location. For those comfortable taking more risk, currency markets offer opportunities with outsized potential.
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ESG Data: The Four Motivations Driving Usage
ESG controversies can damage a company’s value, but ESG data may be able to help manage this risk. What are other reasons for using ESG data?
ESG Data: The Four Motivations Driving Usage
Data is key to the environmental, social, and governance (ESG) revolution. Access to granular ESG data can help boost transparency for market participants. Unfortunately, 63% of U.S. and European asset managers say a lack of quantitative data inhibits their ESG implementation.
Being clear on the potential application of this data is equally important.
- Investors and banks can use ESG data for risk assessment, to spot opportunities, and to push companies for change.
- Companies can publish their own ESG data, quantify progress on their ESG goals, and use data to inform decisions.
- Policymakers can use ESG data to inform regulatory frameworks and measure policy effectiveness.
This graphic from ICE, the second in a three part series on the ESG toolkit, explores four primary motivations of ESG data users.
1. Right Thing
The objective: Having a positive social or environmental impact.
For investors, this can involve screening out companies that conflict with their values and selecting companies that align with their ESG objectives.
As another example, it can involve comparing the social impact of municipal bonds. One way investors can measure social impact is through scores that quantify the potential socioeconomic need of an area, using metrics like poverty and education levels. Here are the social impact scores for three actual municipal bonds issued in Florida.
|State||Bond Issuer||Social Impact Score
(Higher = larger potential impact)
Issuer #1’s bond is projected to have a community impact that is nearly twice as high/positive as Issuer #3’s bond.
For companies, doing the right thing can include assessing their progress on ESG goals and benchmarking themselves to peers. For example, gender and racial representation is a growing area of focus.
The objective: Managing ESG risks, such as climate and reputational risks.
For investors, this can involve back-testing or analysis around specific risk events before they materialize. Here are the risk profiles of two actual municipal bonds in California. The shown bonds are practically identical in many ways, except their wildlife score.
|Issuer #1||Issuer #2|
|Current Coupon Rate||5.0%||5.0%|
|Maturity Date||Aug 01, 2048||August 01, 2048|
|Price to Date (Call Date)||Aug 01, 2027||Aug 01, 2027|
|Wildfire Score (Higher = more risk)||3.6||2.7|
Managing ESG risk can also involve analyzing a company’s policies and governance for weaknesses. This is important as an ESG controversy can have long-lasting effects on the valuation of a company.
In one study, companies with ESG controversies dropped more than 10% in value relative to the S&P 500. They hadn’t fully recovered a year after the incident.
The objective: Targeting outperformance through ESG analysis.
Selecting companies with strong ESG data can align with long-term growth trends and may help boost performance. For heavy emitting industries, research indicates that European companies with lower emissions trade at much higher valuations. The chart below shows companies’ price-to-book ratio relative to the Stoxx 600* sector median.
|Above Median Emission Intensity (Bad)||1.9||1.1||2.0|
|Below Median Emissions Intensity (Good)||2.7||1.9||2.1|
*The Stoxx 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Energy companies with low emissions trade at a valuation nearly two times higher than energy companies with high emissions.
The objective: Understanding and complying with relevant ESG regulation.
The International Sustainability Standards Board has announced a global reporting proposal aligned with the Task Force on Climate-related Financial Disclosures (TCFD). In addition, a growing number of jurisdictions will require organizational reporting that aligns with the TCFD.
- European Union
- Hong Kong
- New Zealand
Not only that, a European Union regulation known as Sustainable Finance Disclosure Regulation (SFDR) came into effect in 2021. It seeks greater transparency in disclosures from firms marketing investment products. Even firms located outside the EU could be impacted if they serve EU customers. In total, the market cap of these non-EU companies exposed to SFDR amounts to $3.2 trillion.
Matching ESG Data with Motivation
There will be growing demand for transparent data as ESG investing flourishes. To remain competitive, investors, policymakers, and companies need access to ESG data that meets their unique objectives.
In Part 3 of the ESG Toolkit series sponsored by ICE, we’ll look at key sustainability index types.
The Hierarchy of Zero Waste
In a world that generates 2 billion tonnes of waste every year, waste management has become a global concern. Here are some strategies to help guide zero waste policies.
The Hierarchy of Zero Waste
Many cities have set ambitious zero waste targets in the upcoming decades.
The idea is to have communities where waste generation is avoided, and products are shared, reused, or refurbished.
This graphic, sponsored by Northstar Clean Technologies, shows the main strategies and hierarchy to guide zero waste policies.
What is Zero Waste?
In a world that generates approximately 2 billion tons of waste every year, waste management has become a global concern. Thus, countries and cities are increasing efforts to reduce or even eliminate waste when possible.
The Zero Waste International Alliance defines zero waste as “the conservation of all resources by means of responsible production, consumption, reuse, and recovery of products, packaging, and materials without burning and with no discharges to land, water, or air that threaten the environment or human health.”
Becoming a zero waste community, however, is a complex task.
Currently, Sweden recycles 99% of locally-produced waste and is considered the best country in the world when it comes to recycling and reusing waste. However, such results only came after almost 40 years of recycling and reuse policies.
In line with this, here are seven commonly accepted steps you can use to achieve zero waste:
1. Rethink, Redesign Products
The global population consumes 110 billion tons of materials each year, but only 8.6% is reused or recycled. In a zero waste society, single-use products are avoided and products are designed with sustainable practices and materials.
Consumption must be planned carefully to reduce the unnecessary use of materials. Consumers must choose products that maximize the usable lifespan and opportunities for continuous reuse. Companies must minimize the quantity and toxicity of materials used.
The value of products is maintained by reusing, repairing, or refurbishing for alternative uses.
Products are diverted from waste streams and recirculated into use. Resilient local markets are developed, allowing the highest and best use of materials.
5. Material Recovery
Component materials like cement, metals, or asphalt are recovered from mixed waste and collected for other applications.
In the U.S. alone, around 12 million tons of asphalt shingle tear-off waste and installation scrap are generated from roof installation each year. Currently, more than 90% of this is discarded in landfills. This material can be repurposed to create new products like liquid asphalt, fiber, and aggregate.
6. Residuals Management
Waste is biologically stabilized and sent to responsibly managed landfills.
The production of materials that are not recoverable and can negatively impact the environment must be avoided.
Reducing our Climate Impact
Reducing, recycling, and recovering materials can be a key part of a climate change strategy to reduce our greenhouse gas emissions.
According to the U.S. Environmental Protection Agency, about 42% of all greenhouse gas emissions are caused by the production and use of goods, including food, products, and packaging.
Even though 100% zero waste may sound difficult to achieve in the near future, a zero waste approach is essential to reduce our impact on the environment.
Northstar Clean Technologies aims to become the leading recovery and reprocessing company for asphalt shingles in North America.
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