I have a question and would appreciate feedback. Not trading-related, but about how capital flows between currencies should/would affect assets denominated in those currencies. Stricly defiined, forex / currencies is not a market to "invest" into. It's a "trading" market. i.e. once I convert my Euros into USD (or vice versa), I have to "put" them somewhere: e.g. in Tbills, in bonds, in stocks, in real estate, in cash under mattress. So, I would assume that the price of assets denominated in the currency, which is experiencing net capital OUTFLOWS, would FALL. Using similar logic, the price of assets in currency experiencing net capital INFLOWS would RISE. Considering the -12% of EUR/USD YTD, suggesting big outflows out of EuroZone, isn't it a bit odd that both EuroZone bonds and stocks (and other assets) were rising during the same time (first 6 months of 2005)? I wonder how much of the volume in the forex market is done in OTC derivatives. Thanks in advance for feedback.
not sure if I can address all your points but about investing in currencies... you certainly can invest in currencies, i.e., in "pairs," buying one while maintaining a sell position in the other. I do it all the time, in fact, currencies are the perfect instrument to invest in. think of it this way, a two-bit company that traded at $80 one day can go the way of the wind the next and take your whole account with it down to a buck. Australia (AUD) or Japan (JPY) or the USA (USD) will hardly do the same. in addition, price fluctuations in forex have tremendous profit opportunities long term, far greater than many "stable" companies. the main difference between buying/selling stocks versus currencies is, with a stock you own (or sell) a part of a company, with currency units you own/sell tiny parts of countries. fx
My scope for asking the question, was from the point of view of "big money". E.g. let's say PIMCO has 200bn "invested" in US notes. It might liquidate those $200 billion worth of US 10yr notes and "trade" (convert) the proceeds into Euros via the FOREX market and "invest" them into German bonds. (They may hedge their exposure to currency fluctuations, or they might not.) If such international capital flows are massive, I would expect the prices of assets denominated in that currency, to get affected. Yet, at first glance, in the case of Euro's -12% drop in 6 months, it doesn't seem to be the case. EU bonds and stocks are much higher than 6 months ago. And I wonder what I am missing.