Trading The USD/SGD Currency Pair? Here’s What You Need To Know
Forex trading offers tremendous advantages for businesses as well as for retail investors. The minute-by-minute fluctuations in foreign currency rates provide individuals with many opportunities to participate in the forex market.
Forex trading offers benefits for businesses as well. They get an opportunity to hedge their income in foreign currencies. This ensures that the effect of currency swings on their profitability is minimised.
Let’s understand how changes in the relative value of the U.S. dollar to the Singapore dollar can affect businesses and individual investors.
Hedging for Businesses
Currencies are always traded in pairs. When you enter into a forex trade, you are essentially making a forecast regarding the relative values of two currencies. Take the example of the USD/SGD pair. Here, the USD is the “base currency”, and the SGD is the “quote currency.”
When you buy USD/SGD, you are buying the base currency and, by implication, selling the quote currency. In this instance, you are buying U.S. dollars and selling Singapore dollars. You would do this if you expected the U.S. dollar to appreciate in value against the Singapore dollar.
But what if you expected the opposite to happen? Your opinion might be that there is a greater likelihood of the Singapore dollar strengthening against the U.S. dollar. In this case, you can opt to sell the USD/SGD pair. This is also known as going short. If the currency rates move in the direction that you have forecasted, your trade would be profitable.
Businesses can utilise hedging transactions to prevent their profits being eroded by the huge fluctuations in currency values. Consider the example of a company that exports goods for which it receives payment in U.S. dollars. If the value of the dollar weakens, the exporter will receive fewer Singapore dollars for the products that it sells overseas. It could hedge its exposure to this risk by going short in a USD/SGD pair to lock in the existing exchange rate.
Trading for retail clients
While the fluctuations in currency rates pose a risk for businesses, they provide a tremendous opportunity for individual traders. The value of the Singapore dollar against the U.S. dollar changes on a constant basis. Couple that fact with the right approach; you may become a profitable trader in a very short amount of time.
Five-day chart for USD/SGD
How can you predict the movement of the Singapore dollar against the U.S. dollar? What are the factors that influence currency rates?
Although it is impossible for anyone to forecast exchange rates with a 100% accuracy, you can increase your chances by using a confluence of several factor before placing a trade, such as utilising new reports and economic data releases that could have an impact on a currency’s value.
Here are some more factors that will have an impact on currency movements:
⇨ Inflation rates – if a country has a high inflation rate, its currency could lose value. As a general rule, nations with low inflation rates have currencies that maintain their value or even appreciate over time.
⇨ Interest rates – when the central bank of a country raises interest rates, the likely outcome is an appreciation of the value of its currency. This happens because higher interest rates attract foreign capital, leading to an increase in demand for the country’s currency.
⇨ Balance of trade – a negative balance of trade could lead to the depreciation of a country’s currency. When the value of a country’s imports exceeds its exports, it needs to raise funds to meet its foreign currency requirements. This can lead to a depreciation in the value of its currency.
Several other factors influence exchange rates. The health of a nation’s economy and the political situation within the country also play an important role in determining a currency’s value. Political instability can lead to a nation’s currency trending downwards.
So, does that mean that there is a direct correlation between currency values and, say, interest rates? Unfortunately, it isn’t as simple as that. An increase in interest rates by a country’s central bank may not lead to a rise in the currency’s value.
Why is that? Sometimes, the market may have been anticipating that interest rates would rise. This may already have been factored into the current exchange rate. There could also be a situation where an interest rate increase could have an adverse effect on the currency. The market could have expected a higher rise. The central bank’s announcement of a lower-than-anticipated figure could have an opposite effect.
How to make money by trading the USD/SGD currency pair
Although making money in the forex market is not an easy task, as with any other ventures with the possibility of generating a rewarding income, it is possible if you are willing to put in the hard work to study the subject thoroughly. Thousands of forex traders regularly make a high level of return on their capital. Remember that you probably won’t make a gain on every trade. Some trades will result in losses while other will give you profits. You just have to ensure that your overall return is positive in the long run.
The first step that you have to take is to develop a sound trading strategy. Ensure that your trades are limited in size. It isn’t a good idea to risk more than 1% or 2% of your capital on a single trade.
It’s also essential to set stop orders carefully. Effective use of stop-loss orders can minimise the amount that you lose and help you to preserve your capital. If you are new to trading forex, you may want to request a demo so that you can familiarise yourself with the trading platform before committing your money.
There is an enormous level of scope for making profits in the forex market. Daily trading volumes across the world exceed U.S.$5 trillion. The forex market is open 24 hours a day, five days a week. You can consider starting your trading journey with Phillip Futures, a brokerage that began operations in 1983.
They offer a diverse range of seminars/webinars on the topic of forex trading that is made available for free to anyone interested in educating themselves in the subject matter. You will also get the benefit of ZERO commission on your trades as well as access to the reputed MetaTrader 5 platform. Spreads are offered at a low of 0.8 pips for the USD/SGD pair. An added advantage is that you will not be charged platform fees or data fees. This will help to cut down on trading costs and lead to increased profits.