Forex Market Overview

Structure

• Decentralised 'interbank' market • Main participants: Central Banks, commercial

and investment banks, hedge funds, corporations & private speculators

• The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971

• Online trading began in the mid to late 1990's

Average Daily Turnover by Instrument

• Trading Hours• 24 hour market • Sunday 5pm EST through Friday 4pm EST. • Trading begins in the Asia-Pacific region followed by the Middle East, Europe, and America• Size• One of the largest financial markets in the world • $4.0 trillion average daily turnover, equivalent to:

– More than 12 times the average daily turnover of global equity markets1 – More than 50 times the average daily turnover of the NYSE2 – More than $500 a day for every man, woman, and child on earth3 – An annual turnover more than 10 times world GDP4

• 1. About $320 billion - World Federation of Exchanges aggregate 2009 2. About $70 billion - World Federation of Exchanges 2009 3. Based on world population of 6.9 billion - US Census Bureau 4. About $58 trillion - World Bank 2009.

Average Daily Turnover by Counterparty

Major Markets

• The US & UK markets account for over 50% of daily turnover

• Major markets: London, New York, Tokyo • Trading activity is heaviest when major markets

overlap5 • Nearly two-thirds of NY activity occurs in the

morning hours while European markets are open6

• 5. The Foreign Exchange Market in the United States - NY Federal Reserve6. The Foreign Exchange Market in the United States - NY Federal Reserve

Average Daily Turnover by Geographic Location

Concentration in the Banking Industry

• 9 banks account for 75% of turnover in the U.K.

• 7 banks account for 75% of turnover in the U.S.

• 2 banks account for 75% of turnover in Switzerland

• 8 banks account for 75% of turnover in Japan

Currencies

• The US dollar is involved in over 80% of all foreign exchange transactions, equivalent to over US$3.3 trillion per day

• Currency Codes• USD = US Dollar • EUR = Euro • JPY = Japanese Yen • GBP = British Pound • CHF = Swiss Franc • AUD = Australian Dollar • NZD = New Zealand Dollar• CAD = Canadian Dollar (Sometimes referred to as the "Loonie") • (The Canadian 1 dollar coin, commonly called Loonie, is a gold-coloured, bronze-

plated, one-dollar coin introduced in 1987. It bears images of a common loon, a bird which is common and well-known in Canada, on the reverse, and of Queen Elizabeth II on the obverse).

Average Daily Turnover by CurrencyN.B. Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%.

Commodity Currencies and Cable Currencies

• Currencies of countries that rely heavily on the export of commodities are often referred to as 'commodity currencies.' An important factor that any Forex trader should consider is that the value of commodity currencies usually rise and fall in tandem with the value of the country's main commodity exports. Both the value of the commodity and the country's trade balance, with respect to the commodity, are significant factors in the valuation of commodity currencies.

• The most commonly traded commodity currencies are those of Canada, New Zealand and Australia. All three of these countries have currencies named "dollar," therefore these commodity currencies are often referred to as 'comdolls.' While other countries export commodities as well, the exports of these three countries make up a larger proportion of their annual Gross Domestic Product (GDP). As such, fluctuations in the value or quantity exported of commodities in these countries will have a more significant impact on the country's currency.

Contd.

• Canada is a significant exporter of oil. While most countries import more oil than is exported, Canada is one of the only developed nations to have a net export of oil. Over the last few years, export of petroleum products has averaged over $60 billion a year. Another notable commodity export for Canada is aluminum, which adds another $8 billion in revenue every year. Canada has also experienced dramatic growth in export of other precious metals including zinc, copper and nickel - each showing year-over-year increases of over 50%.

Contd.

• Australia is the world’s second largest producer of gold, behind South Africa. Why is this important? Gold exports make up a large percentage of the country’s GDP, so changes in gold prices will have a significant impact on the country’s GDP and the value of its currency. And, if production of gold is shown to decline it could also signal a potential weakening of the Aussie Dollar. While Australia is known among Forex traders for its gold exports, oil is also a significant export commodity. Export of petroleum products has been growing at a faster rate in Australia than any other export over the last few years, currently netting the country over $13 billion a year.

Contd.

• New Zealand's exports are not dominated by any one commodity, but the most notable ones include timber, dairy products and meat products. Various commodity indices have be shown to be worthwhile long-term indicators of the New Zealand Dollar's value.

How to Trade Commodity Correlations

• The positive correlation between the commodity currencies and their export commodities is significant, but mostly in the long-term. Short term spikes in commodity prices usually mean little for the correlated currency. Rather, once a long-term trend in commodity prices becomes apparent, the correlated currency pairs often follow. Commodity prices often lead currency prices, giving Forex traders a great opportunity for profit.

Cable currencies

• Slang used among forex traders referring to the exchange rate between the U.S. dollar and the British pound sterling. Because it is the norm in forex for most major currencies to be quoted against the U.S. dollar on a regular basis, "cable" is a commonly used term.

"Cable" can also be used to refer simply to the British pound sterling.

Contd.

• For example, you may hear someone dealing with the forex market saying, "The cable is up today," or, "The cable has been trending lower lately."

The origins of this term are attributed to the fact that in the 1800s, the dollar/pound sterling exchange rate was transmitted via transatlantic cable. Forex brokers are sometimes referred to as "cable dealers".

Currency Pairs

• Majors: EUR/USD (Euro-Dollar), USD/JPY, GBP/USD - (commonly referred to as the "Cable"), USD/CHF

• Commodity currencies: USD/CAD, AUD/USD, NZD/USD - (commonly referred to as the "Kiwi")

• Major crosses: EUR/JPY, EUR/GBP, EUR/CHF

Average Daily Turnover by Currency Pair