The risks and potentials when investing in emerging market currencies

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In their process of economic advancement, emerging economies are slowly playing a more essential role in the international financial markets. For starters, emerging currencies from these developing nations have started to make up a relatively influential percentage in everyday currency trading.

For experts and investors alike, emerging currencies carry unique characteristics compared to their counterparts from economically powerful countries. These very same characteristics reflect their potential for growth – or failure.

Examples of countries with emerging currencies include the Brazilian Real (BRL), the Mexican Peso, and the Indian Rupee (INR). Since emerging currencies are from those countries which are still developing in terms of both political and economic structure, risks will always be around the corner. Dramatic changes in the state of these countries’ political climate can easily topple down a slowly growing currency.

Another quality that differentiates an emerging currency from currencies of larger economies is in terms of how these currencies can be dependent on foreign currencies. “Pegging” is a term used to describe such dependence and the most popular one is how the foreign U.S. dollar serves as a sturdy anchor for domestic currencies.

Nonetheless, seasoned investors know better than to shun emerging market currencies and completely disregard their benefits. Since they come from developing economies that are showing potential for growth especially in the industrial production sector, they attract a huge wealth of foreign capital investments.

Furthermore, emerging currencies’ volatility and fluctuations, when it comes to exchange rates against leading currencies, also open opportunities for traders and market participants because of the benefits and potential profit from these changes in prices.

The Forex market: How big and liquid is it exactly?

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The Foreign Exchange Market (Forex) is a 24-hour over-the-counter market for trading of currencies. Since it has a global scope and is decentralized type of market, transactions take place everywhere in the world with no central and physical location unlike other financial markets like the London Stock Exchange (LSE) and the New York Stock Exchange (NSE). In addition, since there is no clearinghouse or a central exchange, dealers and brokers conduct negotiations directly with one another.

The Forex market is the largest financial market in the world, and not to mention it’s also the most popular among individual investors, central banks, commercial banks, and financial institutions. Since it’s an extremely liquid market, it allows huge trading volumes to take place without greatly affecting price or price action. However, depending on the time of the day and the currency pair, its relative liquidity could influence the market depth.

The Forex market is composed of traders representing hundreds of international banks, central banks, governments, institutional investors, and millions of private traders trading currencies on a daily basis. This huge volume of participants contributes to the market’s turnover rate and based on recent data, it continues to grow.   According to the Bank for International Settlements, the daily trading was $5.1 trillion (as of April 2016). In 2010, it was the average daily turnover was just estimated to be $3.9 trillion.

There are different currencies being traded in the forex market but the ones from highly industrialized countries with the most active economies lead the rank. As of 2017 data, the U.S. dollar against other currency remains the most traded in the market, followed by the Euro.  Other highly traded currencies include the Japanese yen and Chinese yuan.

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