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Making Money On The Forex Markets

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I was thinking about how the big money movers make even more money on the currency market this morning in an effort to understand what could be about to happen. The decision to move your funds would also be influenced by the risk, but I am going to ignore that for the moment because I am going to deal with a situation in which the money movers have decided to take risks to make BIG money.

Currently, if you are holding sterling you would be earning interest determined by the 4.5% BoE base rate, the obvious thing is to move into a currency that is paying a higher interest rate. Now it is at the point that money starts to move that the opportunity to make real money occurs. If the currency markets are finely balanced in terms of financial gain it might be possible to trigger a run on sterling. As sterling is sold its value drops. Now if the BoE just lets it fall there is no advantage to the big movers, but if the currency falls too far then there is a real risk of importing run away inflation, so the BoE must at some point move to defend the currency, either by buying up the currency, to reduce supply, or by increasing the interest rate, to make holding sterling more attractive.

Unfortunately, for the BoE buying up the vast amounts of sterling is just not possible. The BoE / UK just does not have enough crash reserves to do it! So that leaves raising interest rates. Now this is where it gets really interesting for the money movers. If the bank resists for a time and the market goes into herd behaviours then the sterling could fall quite along way. Once the momentum builds up it will take a big hike in rates to reverse the fall. Good news for the money movers, bad news for the debtors amongst us. Now if the BoE moves decisively to defend the currency, now is the time to move back into sterling.

The great thing is that as the sterling as fallen in value the money movers can now buy more pounds than they started with. The other nice point to not is the BoE base rate is significantly high so the return per pound held is greater, as the movers now hold more sterling than they started with it is a compound effect. Even if the rates fall back some (unlikely to go all the way back as the process will just start all over again) the sums of money involved are so huge that just a few days at the high IR would be enough for most of us to retire as very wealthy people.

Should we be concerned? Absolutely! A big move on the FOREX and the UK rates will go up and a huge number of people will get hurt.

The question is, is the market at that sensitive point yet and are the big movers and shakers in the mood to mate on the BoE?

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the situation you described is pretty much what happened when we were forced out of the ERM.

That is what I had in mind, but that was a specific situation and the money making potential was enhanced by the Central banks buying up the currency at temporarily inflated values. The situation at the moment is is slightly different in that it is unlikely the central banks will move to support the currency. Therefore, I think that the markets will need to be very finely balanced for such a co-ordinated move to work.

I think that the FOREX will drive the UK IR. The pressure is to cut rates to support growth. The only problem is that if the UK rates go too low the pound will tank on the FOREX and as I describe above the BoE will have to raise IR to protect the pound.

Judging by the markets today we are not quite there yet!

Edited by FTBagain

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