Types of Capital Flows You Need to Watch
There are two types of capital flows you need to watch - physical flows and portfolio flows.
Physical flows involve investment activity that produces products and services, while portfolio flows involve the exchange of equities, such as stocks and bonds.
The physical flows currency traders want to watch include: - Foreign direct investment - whenever you read that a major corporation is building a plant in another country, it is considered a foreign direct investment.
- Joint ventures - if you read about a US corporation partnering with a corporation in another country, it is considered a joint venture.
- Third party licensing agreements - if you hear that a foreign company is buying the rights to patented products or business processes or the rights to use a brand name, this would fit in the category of third party licensing agreements.
Any major deals affecting physical flows could move the currency market, because in order to carry out these agreements, currency would need to be bought and sold.
Currently, most of the world's capital belongs to the United States, Europe, and Japan, while most of the world's cheapest labor if found in China, India, and other emerging nations.
Growth in the developing nations is also much stronger than that of the developed nations.
Money has been moving from developed to emerging nations for years, so why do we seem to feel that economic pain in the United States more than we have in past years? One major factor that explains this new pain is the speed at which capital can flow.
Today, massive amounts of capital can move quickly around the world through electronic transmission many times in a matter of seconds.
In addition, the costs of moving this capital from one country to another dropped dramatically over the past 20 years, as barriers to currency trading were lifted.
In addition to physical flows, you should also watch portfolio flows.
These involve the buying and selling of stocks and bonds.
When a stock market rallies in any part of the world, this becomes an investment opportunity for investors in any other part of the world, thanks to the speed at which capital can flow.
Geographic location is no longer a barrier for stock investors.
Why does this matter to currency traders? In order for investors to buy stocks in another country, they must first buy that country's currency.
When a currency is in demand for stock investment, then the value of that currency will rise.
Fixed-income investments or bonds can also be attractive to investors because they offer more safety and a constant flow of income from the interest paid on them.
Watch the yields on foreign bonds compared to US bonds.
When interest rates are higher outside the United States, you will see more investors buying foreign bonds, which means they likely are buying the currency with the most attractive bond interest rates and possibly selling US dollars to do so.
Physical flows involve investment activity that produces products and services, while portfolio flows involve the exchange of equities, such as stocks and bonds.
The physical flows currency traders want to watch include: - Foreign direct investment - whenever you read that a major corporation is building a plant in another country, it is considered a foreign direct investment.
- Joint ventures - if you read about a US corporation partnering with a corporation in another country, it is considered a joint venture.
- Third party licensing agreements - if you hear that a foreign company is buying the rights to patented products or business processes or the rights to use a brand name, this would fit in the category of third party licensing agreements.
Any major deals affecting physical flows could move the currency market, because in order to carry out these agreements, currency would need to be bought and sold.
Currently, most of the world's capital belongs to the United States, Europe, and Japan, while most of the world's cheapest labor if found in China, India, and other emerging nations.
Growth in the developing nations is also much stronger than that of the developed nations.
Money has been moving from developed to emerging nations for years, so why do we seem to feel that economic pain in the United States more than we have in past years? One major factor that explains this new pain is the speed at which capital can flow.
Today, massive amounts of capital can move quickly around the world through electronic transmission many times in a matter of seconds.
In addition, the costs of moving this capital from one country to another dropped dramatically over the past 20 years, as barriers to currency trading were lifted.
In addition to physical flows, you should also watch portfolio flows.
These involve the buying and selling of stocks and bonds.
When a stock market rallies in any part of the world, this becomes an investment opportunity for investors in any other part of the world, thanks to the speed at which capital can flow.
Geographic location is no longer a barrier for stock investors.
Why does this matter to currency traders? In order for investors to buy stocks in another country, they must first buy that country's currency.
When a currency is in demand for stock investment, then the value of that currency will rise.
Fixed-income investments or bonds can also be attractive to investors because they offer more safety and a constant flow of income from the interest paid on them.
Watch the yields on foreign bonds compared to US bonds.
When interest rates are higher outside the United States, you will see more investors buying foreign bonds, which means they likely are buying the currency with the most attractive bond interest rates and possibly selling US dollars to do so.
Source...